UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

ARKANSAS BEST CORPORATION

3801 Old Greenwood Road
Fort Smith, Arkansas 72903
(479) 785-6000

Not Applicable

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ARKANSAS BEST CORPORATION

INDEX

PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARKANSAS BEST CORPORATION

Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to consolidated financial statements.

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ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS — continued

Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to consolidated financial statements.

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ARKANSAS BEST CORPORATION

(1)

The nine months ended September 30, 2003 includes a pre-tax noncash charge of $8.9 million due to no longer forecasting interest payments on $110.0 million of borrowings.

See notes to consolidated financial statements.

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ARKANSAS BEST CORPORATION

(a)		The accumulated loss from the foreign currency translation in accumulated other comprehensive loss is $0.2 million, net of taxes of $0.2 million, at December 31, 2003 and $0.2 million, net of taxes of $0.1 million, at September 30, 2004.
(b)		The minimum pension liability included in accumulated other comprehensive loss is $3.9 million, net of taxes of $2.5 million, at both December 31, 2003 and September 30, 2004.
(c)		Total comprehensive income for the three months ended September 30, 2004 was $27.4 million. Total comprehensive income for the three and nine months ended September 30, 2003 was $16.9 million and $37.5 million, respectively.

See notes to consolidated financial statements.

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ARKANSAS BEST CORPORATION

See notes to consolidated financial statements.

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ARKANSAS BEST CORPORATION

NOTE A — ORGANIZATION AND DESCRIPTION OF BUSINESS

Arkansas Best Corporation (the “Company”) is a holding company engaged through its subsidiaries primarily in motor carrier and intermodal transportation operations. Principal subsidiaries are ABF Freight System, Inc. (“ABF”); Clipper Exxpress Company (“Clipper”); and FleetNet America, Inc. (“FleetNet”).

On March 28, 2003, the International Brotherhood of Teamsters (“IBT”) announced the ratification of its National Master Freight Agreement with the Motor Freight Carriers Association (“MFCA”) by its membership. The agreement has a five-year term and was effective April 1, 2003. The agreement provides for annual contractual wage and benefit increases of approximately 3.2% - 3.4%. Approximately 78% of ABF’s employees are covered by the agreement. Carrier members of the MFCA ratified the agreement on the same date.

NOTE B — FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the Company’s financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

On January 23, 2003, the Company’s Board of Directors approved the Company’s repurchase from time to time, in the open market or in privately negotiated transactions, up to a maximum of $25.0 million of the Company’s Common Stock. The repurchases may be made either from the Company’s cash reserves or from other available sources. During the third quarter of 2004, the Company made no open-market purchases of its Common Stock. Since January 23, 2003, the Company has purchased a total of 471,500 shares, totaling $12.4 million.

On January 28, 2004, the Company announced that its Board had increased its quarterly cash dividend from eight cents per share to twelve cents per share. The following table is a summary of dividends declared and/or paid during the applicable quarter being reported upon or subsequent thereto:

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

Accounting Policies

Revenue Recognition: Revenue is recognized based on relative transit time in each reporting period with expenses recognized as incurred. The Company reports revenue and purchased transportation expense on a gross basis for certain shipments where ABF utilizes a third-party carrier for pickup or delivery of freight but remains the primary obligor.

Reclassifications: Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. The 2003 statement of operations includes a reclassification to report revenue and purchased transportation expense, on a gross basis, for certain shipments where ABF utilizes a third-party carrier for pickup or delivery of freight but remains the primary obligor. The amounts reclassified were $7.5 million and $21.0 million for the three and nine months ended September 30, 2003. The comparable amounts for the same periods in 2004 were $7.5 million and $21.3 million, respectively. There was no impact on ABF’s operating income and only a slight impact on ABF’s operating ratio as a result of this reclassification.

NOTE C – STOCK-BASED COMPENSATION

The Company maintains three stock option plans which provide for the granting of options to directors and key employees of the Company. The 1992 Stock Option Plan expired on December 31, 2001 and, therefore, no new options can be granted under this plan. The 2000 Non-Qualified Stock Option Plan is a broad-based plan that allows for the granting of 1.0 million options. The 2002 Stock Option Plan allows for the granting of 1.0 million options, as well as two types of stock appreciation rights (“SARs”), which are payable in shares or cash. Employer SARs allow the Company to decide, when an option is exercised, whether or not to treat the exercise as a SAR. Employee SARs allow the optionee to decide, when exercising an option, whether or not to treat it as a SAR. As of September 30, 2004, the Company had not elected to treat any exercised options as Employer SARs. All options or SARs granted are exercisable starting on the first anniversary of the grant date, with 20.0% of the shares or rights covered, thereby becoming exercisable at that time and with an additional 20.0% of the option shares or SARs becoming exercisable on each successive anniversary date, with full vesting occurring on the fifth anniversary date. The options or SARs are granted for a term of 10 years. The options or SARs granted during 2004 and 2003, under each plan, are as follows:

The Company accounts for stock options under the “intrinsic value method” and the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related interpretations, including Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation. No stock-based employee compensation expense is reflected in net income, as all options granted under the Company’s plans have an exercise price equal to the market value of the underlying Common Stock on the date of grant.

The Company has elected to use the APB 25 intrinsic value method because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (“FAS 123”), Accounting for Stock-Based Compensation, requires the use of theoretical option valuation models, such as the Black-Scholes model, that were not developed for use in valuing employee stock options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

For companies accounting for their stock-based compensation under the APB 25 intrinsic value method, pro forma information regarding net income and earnings per share is required and is determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for these options is estimated at the date of grant, using a Black-Scholes option pricing model. The Company’s pro forma assumptions for 2004 and 2003 are as follows:

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition under FAS 123 to stock-based employee compensation:

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft on Share-Based Payments, which is a proposed amendment to FAS 123 (“Statement 123R”). Statement 123R would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The FASB expects to issue a final standard on or around December 15, 2004 that would be effective for public companies for interim or annual periods beginning after June 15, 2005.

If Statement 123R is issued in final form, the Company will be required to expense the fair value of the stock options granted and the fair value of unvested prior grants, beginning July 1, 2005. The expense for these options will occur over the option vesting period. The Company’s 2003 Annual Report on Form 10-K includes pro forma information in Note B regarding the impact of expensing stock options on the Company’s net income and earnings per share for prior years.

NOTE E — LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS

Various legal actions, the majority of which arise in the normal course of business, are pending. The Company maintains liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company has accruals for certain legal and environmental exposures. None of these legal actions is expected to have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

The Company’s subsidiaries, or lessees, store fuel for use in tractors and trucks in approximately 78 underground tanks located in 25 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company’s underground storage tanks are required to have leak detection systems. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company.

The Company has received notices from the Environmental Protection Agency (“EPA”) and others that it has been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response Compensation and Liability Act, or other federal or state environmental statutes, at several hazardous waste sites. After investigating the Company’s or its subsidiaries’ involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $109,000 over the last 10 years primarily at eight sites) or believes its obligations, other than those specifically accrued for, with respect to such sites, would involve immaterial monetary liability, although there can be no assurances in this regard.

As of September 30, 2004 and December 31, 2003, the Company had accrued approximately $3.5 million and $2.9 million, respectively, to provide for environmental-related liabilities. The Company’s environmental accrual is based on management’s best estimate of the liability. The Company’s estimate is founded on management’s experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. Accruals for environmental liability are included in the balance sheet as accrued expenses and in other liabilities.

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

NOTE F – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The following is a summary of the components of Net Periodic Benefit Cost:

The Company’s full-year 2004 pension expense is estimated to be $9.5 million compared to $11.1 million for the year ended December 31, 2003. During the second quarter of 2004, the Company made the maximum allowed tax-deductible contribution of $1.2 million to its nonunion defined benefit pension plan.

The Company sponsors unfunded defined benefit postretirement health care and life insurance plans for certain employees. Effective December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Prescription Drug Act”) was enacted into law. The Prescription Drug Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.

During May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP No. 106-2”). This standard requires sponsors of defined benefit postretirement health care plans to make a reasonable determination whether (1) the prescription drug benefits under its plan are actuarially equivalent to Medicare Part D and thus qualify for the subsidy under the Prescription Drug Act and (2) the expected subsidy will offset or reduce the employer’s share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. Sponsors whose plans meet both of these criteria are required to remeasure the accumulated postretirement benefit obligation and net periodic postretirement benefit expense of their plans to reflect the effects of the Prescription Drug Act in the first interim or annual reporting period beginning after June 15, 2004.

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

During the third quarter of 2004, the Company determined that the prescription drug benefits provided under its postretirement health care plan were actuarially equivalent to Medicare Part D and thus would qualify for the subsidy under the Prescription Drug Act and the expected subsidy would offset its share of the cost of the underlying drug coverage. The Company adopted the provisions of FSP No. 106-2 during the third quarter of 2004 and remeasured its accumulated postretirement benefit obligation and net periodic postretirement benefit expense as of January 1, 2004. The accumulated postretirement benefit obligation was reduced by $1.8 million as a result of the subsidy related to benefits attributed to past service. This reduction in the accumulated postretirement benefit obligation was recorded as a deferred actuarial gain and will be amortized over future periods in the same manner as other deferred actuarial gains or losses. The first and second quarters of 2004 were not restated to reflect the effect of the subsidy on the measurement of net periodic postretirement benefit expense because the effect on those interim periods was immaterial. The effect of the subsidy on the measurement of net periodic postretirement benefit expense for the three and nine months ended September 30, 2004 is as follows:

The Company presently anticipates making eligible gross payments for prescription drug benefits and receiving the Medicare Part D subsidy on those payments in 2006 as prescribed in the proposed regulations.

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

NOTE G — DERIVATIVE FINANCIAL INSTRUMENTS

On February 23, 1998, the Company entered into an interest rate swap agreement with an effective date of April 1, 1998 and a termination date of April 1, 2005 on a notional amount of $110.0 million. Until March 19, 2003, the interest rate swap was designated as a cash flow hedge of the variable 30-day LIBOR-based interest rate payments on $110.0 million of borrowings under the Company’s $225.0 million Credit Agreement (“Credit Agreement”). Under the swap agreement, the Company pays a fixed interest rate of 5.845% (plus the Credit Agreement margin which was 0.775% at both September 30, 2004 and December 31, 2003) and receives 30-day LIBOR on the $110.0 million notional amount.

On March 19, 2003, the Company announced its intention to sell its 19.0% ownership interest in Wingfoot Commercial Tire Systems, LLC (“Wingfoot”) to The Goodyear Tire & Rubber Company (“Goodyear”) and use the proceeds to pay down Credit Agreement borrowings. As a result, the Company forecasted Credit Agreement borrowings to be below the $110.0 million level and reclassified the majority of the negative fair value of the swap on March 19, 2003 of $8.5 million (pre-tax), or $5.2 million net of taxes, from accumulated other comprehensive loss into earnings on the income statement. The transaction closed on April 28, 2003 and management used the proceeds received from Goodyear to pay down its Credit Agreement borrowings below the $110.0 million level. Changes in the fair value of the interest rate swap since March 19, 2003 have been accounted for in the Company’s income statement. Future changes in the fair value of the interest rate swap will be accounted for through the income statement until the interest rate swap matures on April 1, 2005, unless the Company terminates the arrangement prior to that date.

The fair value of the interest rate swap reflected on the Company’s balance sheet at September 30, 2004 and December 31, 2003 is a liability of $2.0 million and $6.3 million, respectively, which represents the amount the Company would have had to pay if it had terminated the swap as of those dates.

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

NOTE H — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

For both the three and nine months ended September 30, 2004, the Company had no outstanding stock options granted that were antidilutive. For the three and nine months ended September 30, 2003, respectively, the Company had outstanding 275,676 and 295,676 in stock options granted that were antidilutive and therefore were not included in the diluted-earnings-per-share calculations for either period presented.

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

NOTE I – OPERATING SEGMENT DATA

The Company uses the “management approach” to determine its reportable operating segments, as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company’s management uses to make decisions about operating matters. Management uses operating revenues, operating expense categories, operating ratios, operating income and key operating statistics to evaluate performance and allocate resources to the Company’s operating segments.

During the periods being reported on, the Company operated in two defined reportable operating segments: (1) ABF and (2) Clipper.

The Company eliminates intercompany transactions in consolidation. However, the information used by the Company’s management with respect to its reportable segments is before intercompany eliminations of revenues and expenses. Intercompany revenues and expenses are not significant.

Further classifications of operations or revenues by geographic location beyond the descriptions provided above are impractical and are, therefore, not provided. The Company’s foreign operations are not significant.

The following tables reflect reportable operating segment information for the Company, as well as a reconciliation of reportable segment information to the Company’s consolidated operating revenues, operating expenses, operating income and consolidated income before income taxes:

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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited)

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company’s accounting estimates that are “critical,” or the most important, to understand the Company’s financial condition and results of operations and that require management of the Company to make the most difficult judgments are described as follows:

Management of the Company utilizes a bill-by-bill analysis to establish estimates of revenue in transit to recognize in each reporting period under the Company’s accounting policy for revenue recognition. The Company uses a method prescribed by Emerging Issues Task Force Issue No. 91-9 (“EITF 91-9”), Revenue and Expense Recognition for Freight Services in Process, where revenue is recognized based on relative transit times in each reporting period with expenses being recognized as incurred. Because the bill-by-bill methodology utilizes the approximate location of the shipment in the delivery process to determine the revenue to recognize, management of the Company believes it to be a reliable method. The Company reports revenue and purchased transportation expense, on a gross basis, for certain shipments where ABF utilizes a third-party carrier for pickup or delivery of freight but remains the primary obligor.

The Company estimates its allowance for doubtful accounts based on the Company’s historical write-offs, as well as trends and factors surrounding the credit risk of specific customers. In order to gather information regarding these trends and factors, the Company performs ongoing credit evaluations of its customers. The Company’s allowance for revenue adjustments is an estimate based on the Company’s historical revenue adjustments. Actual write-offs or adjustments could differ from the allowance estimates the Company makes as a result of a number of factors. These factors include unanticipated changes in the overall economic environment or factors and risks surrounding a particular customer. The Company continually updates the history it uses to make these estimates so as to reflect the most recent trends, factors and other information available. Actual write-offs and adjustments are charged against the allowances for doubtful accounts and revenue adjustments. Management believes this methodology to be reliable in estimating the allowances for doubtful accounts and revenue adjustments.

The Company utilizes tractors and trailers primarily in its motor carrier transportation operations. Tractors and trailers are commonly referred to as “revenue equipment” in the transportation business. Under its accounting policy for property, plant and equipment, management establishes appropriate depreciable lives and salvage values for the Company’s revenue equipment based on their estimated useful lives and estimated fair values to be received when the equipment is sold or traded. Management continually monitors salvage values and depreciable lives in order to make timely, appropriate adjustments to them. The Company’s gains and losses on revenue equipment have been historically immaterial, which reflects the accuracy of the estimates used. Management has a policy of purchasing its revenue equipment rather than utilizing off-balance-sheet financing.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

The Company has a noncontributory defined benefit pension plan covering substantially all noncontractual employees. Benefits are generally based on years of service and employee compensation. The Company accounts for its nonunion pension plan in accordance with Statement of Financial Accounting Standards No. 87 (“FAS 87”), Employer’s Accounting for Pensions, and follows the revised disclosure requirements of Statement of Financial Accounting Standards No. 132 (“FAS 132”), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The Company’s pension expense and related asset and liability balances are estimated based upon a number of assumptions. The assumptions with the greatest impact on the Company’s expense are the assumed compensation cost increase, the expected return on plan assets and the discount rate used to discount the plan’s obligations.

The following table provides the key assumptions the Company used for 2003 compared to those it is utilizing for 2004 pension expense:

The assumptions used directly impact the pension expense for a particular year. If actual results vary from the assumption, an actuarial gain or loss is created and amortized into pension expense over the average remaining service period of the plan participants beginning in the following year. The improved stock market performance in 2003 positively impacted the Company’s pension plan assets and created an actuarial gain. The Company has increased its pension plan return on assets in accordance with its approach to establishing the rate. This approach considers the historical returns for the plan’s current investment mix, which improved as a result of an improved stock market in 2003, and its investment advisor’s range of expected returns for the plan’s current investment mix. An increase in expected returns on plan assets, higher assets on which to earn a return and actuarial gains, decrease the Company’s pension expense. A 1.0% increase in the pension plan rate of return would reduce annual pension expense (pre-tax) by approximately $1.6 million. The Company’s full-year 2004 pension expense is estimated to be $9.5 million.

The Company has elected to follow Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options because the alternative fair value accounting provided for under the Statement of Financial Accounting Standards No. 123 (“FAS 123”), Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing employee stock options and are theoretical in nature. Under APB 25, because the exercise price of the Company’s employee and director options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. See Note D for Recent Accounting Pronouncements regarding the Financial Accounting Standards Board’s proposed Statement 123R.

The Company is self-insured up to certain limits for workers’ compensation and certain third-party casualty claims. For 2004 and 2003, these limits are $1.0 million per claim for both workers’ compensation claims and third-party casualty claims. Workers’ compensation and third-party casualty claims liabilities recorded in the financial statements total $60.9 million and $53.7 million at September 30, 2004 and December 31, 2003, respectively. The Company does not discount its claims liabilities. Under the Company’s accounting policy for claims, management annually estimates the development of the claims based upon a third party’s calculation of development factors and analysis of historical trends. This annual update of the development of claims allows

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

management to address any changes or trends identified in the process. Actual payments may differ from management’s estimates as a result of a number of factors. These factors include increases in medical costs and the overall economic environment, as well as many other factors. The actual claims payments are charged against the Company’s accrued claims liabilities and have been reasonable with respect to the estimates of the liabilities made under the Company’s methodology.

The Company is a party to an interest rate swap which matures on April 1, 2005 and was designated as a cash flow hedge until March 19, 2003 under the provisions of Statement of Financial Accounting Standards No. 133 (“FAS 133”), Accounting for Derivative Financial Instruments and Hedging Activities. The fair value of the swap of ($2.0) million at September 30, 2004 and ($6.3) million at December 31, 2003 is recorded on the Company’s balance sheet as a liability. Subsequent to March 19, 2003, changes in the fair value of the interest rate swap have been and will continue to be accounted for through the income statement until the interest rate swap matures on April 1, 2005, unless the Company terminates the arrangement prior to that date.

The Company has no current plans to change the methodologies outlined above, which are utilized in determining its critical accounting estimates.

Liquidity and Capital Resources

Cash and cash equivalents totaled $45.3 million and $5.3 million at September 30, 2004 and December 31, 2003, respectively. During the nine months ended September 30, 2004, cash provided from operations of $100.7 million and proceeds from asset sales of $12.3 million were used to purchase revenue equipment (tractors and trailers used primarily in the Company’s motor carrier transportation operations) and other property and equipment totaling $63.8 million, pay dividends on Common Stock of $9.0 million and purchase 271,500 shares of the Company’s Common Stock for $7.5 million. During the nine months ended September 30, 2003, cash provided from operations of $56.1 million, proceeds from the sale of Wingfoot of $71.3 million, proceeds from asset sales of $2.5 million and available cash were used to purchase revenue equipment and other property and equipment totaling $63.9 million, pay dividends on Common Stock of $6.0 million, purchase 200,000 shares of the Company’s Common Stock for $4.8 million and reduce outstanding debt by $92.6 million.

The following is a table providing the aggregate annual obligations of the Company including debt, capital lease maturities and future minimum rental commitments:

The Company’s primary subsidiary, ABF, maintains ownership of most of its larger terminals or distribution centers. ABF leases certain terminal facilities, and Clipper leases its office facilities. At September 30, 2004, the Company had future minimum rental commitments, net of noncancelable subleases, totaling $47.0 million for terminal facilities and Clipper’s general office facility and $1.6 million primarily for other equipment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

During the second quarter of 2004, the Company made the maximum allowed tax-deductible contribution of $1.2 million to its nonunion defined benefit pension plan. The recent pension plan funding relief, signed into law on April 10, 2004 by President Bush, has no impact on the Company’s contributions to its pension plan in 2004 because the Company has no required minimum contributions.

The Company has an unfunded supplemental pension benefit plan for the purpose of supplementing benefits under the Company’s defined benefit plan. During 2004, the Company made distributions of $3.3 million to plan participants. Based upon currently available information, future distributions of benefits are anticipated to be none in 2005, between an estimated $8.0 million and $11.0 million in 2006, with no other anticipated distributions occurring until the year 2010. Distributions are funded from general corporate cash funds.

The Company also sponsors an insured postretirement health benefit plan that provides supplemental medical benefits, life insurance, accident and vision care to certain full-time officers of the Company and certain subsidiaries. The plan is generally noncontributory, with the Company paying the premiums. The Company estimates postretirement health benefit payments to be between $0.9 million and $1.0 million for 2004.

The Company is party to an interest rate swap on a notional amount of $110.0 million. The purpose of the swap was to limit the Company’s exposure to increases in interest rates on $110.0 million of bank borrowings over the seven-year term of the swap. The interest rate under the swap is fixed at 5.845% plus the Credit Agreement margin, which was 0.775% at both September 30, 2004 and December 31, 2003. The fair value of the Company’s interest rate swap was ($2.0) million at September 30, 2004 and ($6.3) million at December 31, 2003 and represents the amount the Company would have had to pay at those dates if the interest rate swap agreement were terminated. The fair value of the swap is impacted by changes in rates of similarly termed Treasury instruments. The liability is recognized on the Company’s balance sheet in accordance with FAS 133 at September 30, 2004 and December 31, 2003 (see Note G).

The Company has guaranteed approximately $0.3 million that relates to a debt owed by The Complete Logistics Company (“CLC”) to the owner of a company CLC acquired in 1995. CLC was a wholly owned subsidiary of the Company until 1997, when CLC was sold. The Company’s exposure to this guarantee declines by approximately $60,000 per year.

As reported in the Company’s 2003 Annual Report on Form 10-K, the Company forecasted capital expenditures, net of proceeds from asset sales, to be $76.3 million in 2004. The Company has updated its net capital expenditures forecast to be approximately $67.0 million for 2004. Although the Company has not finalized its plans for 2005 capital expenditures, it is anticipated that the net capital expenditures for 2005 will exceed the net capital expenditures anticipated for 2004.

The Company has two principal sources of available liquidity, which are its operating cash and the $171.6 million it has available under its revolving Credit Agreement at September 30, 2004. The Company has generated between approximately $65.0 million and $90.0 million of operating cash annually for the years 2001 through 2003 and has generated $101.0 million of operating cash through the first nine months of 2004. Management of the Company is not aware of any known trends or uncertainties that would cause a significant change in its sources of liquidity. The Company expects cash from operations and its available revolver to continue to be principal sources of cash to finance its annual debt maturities, lease commitments, letter of credit commitments, quarterly dividends, stock repurchases, nonunion pension contributions and capital expenditures. On September 26, 2003, the Company amended and restated its existing three-year $225.0 million Credit Agreement dated as of May 15, 2002 with Wells Fargo Bank Texas, National Association as Administrative

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

Agent and Lead Arranger, and Bank of America, N.A. and SunTrust Bank as Co-Syndication Agents, and Wachovia Bank, National Association as Documentation Agent. The amendment extended the original maturity date for two years, to May 15, 2007. The Credit Agreement provides for up to $225.0 million of revolving credit loans (including a $125.0 million sublimit for letters of credit) and allows the Company to request extensions of the maturity date for a period not to exceed two years, subject to participating bank approval. The Credit Agreement also allows the Company to request an increase in the amount of revolving credit loans as long as the total revolving credit loans do not exceed $275.0 million, subject to the approval of participating banks.

At September 30, 2004, there were no outstanding Revolver Advances and approximately $53.4 million of outstanding letters of credit. At December 31, 2003, there were no outstanding Revolver Advances and approximately $58.4 million of outstanding letters of credit. The Credit Agreement contains various covenants, which limit, among other things, indebtedness, distributions, stock repurchases and dispositions of assets and which require the Company to meet certain quarterly financial ratio tests. As of September 30, 2004, the Company was in compliance with the covenants. Interest rates under the agreement are at variable rates as defined by the Credit Agreement.

The Company’s Credit Agreement contains a pricing grid that determines its LIBOR margin, facility fees and letter of credit fees. The pricing grid is based on the Company’s senior debt rating agency ratings. A change in the Company’s senior debt ratings could potentially impact its Credit Agreement pricing. In addition, if the Company’s senior debt ratings fall below investment grade, the Company’s Credit Agreement provides for limits on additional permitted indebtedness without lender approval, acquisition expenditures and capital expenditures. The Company is currently rated BBB+ by Standard & Poor’s Rating Service (“S&P”) and Baa3 by Moody’s Investors Service, Inc. The Company has no downward rating triggers that would accelerate the maturity of its debt. On October 15, 2004, S&P revised its outlook on the Company to positive from stable. At the same time, S&P affirmed the Company’s BBB+ corporate credit rating. In its press release announcing this change, S&P stated, “The change to a positive outlook was driven by the company’s continued strong operating performance, which has resulted from increased tonnage levels, improved pricing and management initiatives to control costs and improve productivity.” In addition, S&P stated, “Ratings on Arkansas Best Corporation reflect the company’s solid competitive position, moderate financial policies and strong financial profile.”

The Company has not historically entered into financial instruments for trading purposes, nor has the Company historically engaged in hedging fuel prices. No such instruments were outstanding during the first nine months of 2004 or the full year of 2003.

Off-Balance-Sheet Arrangements

The Company’s off-balance-sheet arrangements include future minimum rental commitments, net of cancelable subleases, of $48.6 million, and a guarantee of $0.3 million, both of which have been previously discussed. The Company has no investments, loans or any other known contractual arrangements with special-purpose entities, variable interest entities or financial partnerships and has no outstanding loans with executive officers or directors of the Company.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

Operating Segment Data

The following table sets forth, for the periods indicated, a summary of the Company’s operating expenses and operating income by segment as a percentage of revenue for the applicable segment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

Results of Operations

Executive Overview

Arkansas Best Corporation’s operations include two primary operating subsidiaries, ABF and Clipper. For the nine months ended September 30, 2004, ABF represented 92.0% and Clipper represented 6.0% of total revenues. The Company’s results of operations are primarily driven by ABF. On an ongoing basis, ABF’s ability to operate profitably and generate cash is impacted by its tonnage, which creates operating leverage at higher levels, the pricing environment, and its ability to manage costs effectively, primarily in the area of salaries, wages and benefits (“labor”).

ABF’s ability to maintain or grow existing tonnage levels is impacted by the state of the U.S. economy as well as a number of other competitive factors, which were more fully described in the General Development of Business section of the Company’s 2003 Form 10-K. ABF’s results were negatively impacted in 2002 and 2001 by tonnage declines resulting from declines in the U.S. economy and the September 11 terrorist attacks. ABF’s LTL per-day tonnage grew slightly in 2003. Following minimal increases in February and March of 2004, ABF’s year-over-year LTL tonnage levels began to dramatically improve in April by percentages not seen in several years. ABF’s third quarter 2004 LTL tonnage per day increased 10.0% over the third quarter of 2003. Through the first nineteen days of October, average daily tonnage figures in ABF’s core LTL business are slightly over nine percent higher than the comparable period in 2003. Management of the Company believes these increases primarily reflect an improving U.S. economy.

Two major events are impacting the competitive landscape for ABF in 2004: the new Hours of Service Regulations that went into effect on January 4, 2004 (see discussion below regarding a recent Congressional vote) and the combining of two of ABF’s primary competitors, Yellow Corporation (“Yellow”) and Roadway Corporation (“Roadway”) that occurred on December 11, 2003.

With respect to the Hours of Service Regulations, the truckload industry has anticipated significantly higher costs associated with driver pay, customer delays and increased charges for stop-off and detention services. As a result, ABF predicted that it would be handling some larger shipments that historically moved by truckload carriers. During the first nine months of 2004, ABF’s truckload tonnage per day increased 11.7% over the same period in 2003. However, the Company believes this tonnage increase is related more to an overall tightening of general truckload capacity due to the improving U.S. economy rather than to the effects of the changes in the federal Hours of Service Regulations. ABF anticipates the rate of truckload tonnage growth will decrease some in the fourth quarter of 2004 over the same period in 2003, because in the fourth quarter of 2003 truckload capacity tightened and Hours of Service freight began impacting ABF.

On September 30, 2004, the U.S. Congress voted to extend the current Hours of Service Regulations until no later than September 30, 2005. This followed a mid-July 2004 ruling by the U.S. Court of Appeals for the District of Columbia that vacated those rules. The Company believes that the existing rules have had a positive impact on highway safety and the welfare of its employees.

With respect to the Yellow-Roadway combination, because both companies are primary competitors of ABF, the potential exists for ABF to gain additional business from customers moving their business away from either Yellow or Roadway as a result of the combination, although there can be no certainty that the impact on ABF will be favorable. As previously stated, management believes ABF’s LTL tonnage growth through the first nine months of 2004 primarily reflects an improving U.S. economy.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

The pricing environment is a key to ABF’s operating performance. The impact of changes in the pricing environment is measured by LTL-billed revenue per hundredweight, although this measure is also affected by profile factors such as average shipment size, average length of haul and customer mix. The environment in 2003 was positive, with ABF growing LTL-billed revenue per hundredweight, net of fuel surcharges, by 4.9% over 2002. During the three and nine months ended September 30, 2004, the pricing environment remained firm as industry capacity continued to tighten during the historically busy third quarter with LTL-billed revenue per hundredweight, net of fuel surcharges, increasing by 1.7% and 2.5%, respectively. ABF’s average LTL shipment was approximately two percent larger than in last year’s third quarter and LTL length of haul decreased by about two percent, when compared to the same period of 2003. Both of these profile changes have an adverse effect on nominal yield growth. As the U.S. economy continues to improve and capacity tightens further, the general pricing environment should remain firm, although there can be no assurances in this regard.

For the first nine months of 2004, salaries, wages and benefits costs accounted for 61.8% of ABF’s revenue. Labor costs are impacted by ABF’s contractual obligation under its agreement with the International Brotherhood of Teamsters (“IBT”). In addition, ABF’s ability to effectively manage labor costs has a direct impact on its operating performance. Shipments per dock, street and yard hour (“DSY”) is the measure ABF uses to assess this effectiveness, although total weight per hour may also be a relevant measure when the average shipment size is changing. ABF is generally very effective in managing its labor costs to business levels. As a result of improving tonnage levels and recent employee retirements, ABF has experienced an increased demand for additional employees in specific locations, particularly for over-the-road drivers, city drivers and freight handlers. Although the ABF positions are highly desirable in the industry, the Company’s pace of hiring has been slower than preferred, due to the improvement in the U.S. economy and to ABF’s high employee standards related to safety and work experience. As a result, in 2004 ABF has used a higher-than-normal percentage of rail for linehaul movements and a greater level of overtime. ABF’s employment efforts are being successful. ABF expects to continue its recruitment efforts as the U.S. economy improves and tonnage levels increase.

The Company ended the first nine months of 2004 with no borrowings under its revolving Credit Agreement, $42.1 million in temporary cash investments and $443.5 million in equity. Because of the Company’s financial position at September 30, 2004, ABF should continue to be in a position to take advantage of any potential growth opportunities discussed above.

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003

For the three and nine months ended September 30, 2004, consolidated revenues increased 12.6% and 8.6%, respectively, and operating income increased 54.4% and 62.4%, respectively, compared to the same periods in 2003, primarily due to revenue growth and improved operating results at ABF, as discussed below in the ABF section of Management’s Discussion and Analysis.

Net income for the three and nine months ended September 30, 2004 was $27.4 million and $51.1 million, respectively, compared to $17.0 million and $31.4 million for the same periods in 2003. Net income for the nine months ended September 30, 2003 included a gain on the sale of the Company’s 19% interest in Wingfoot and a one-time charge related to the fair value of the Company’s interest rate swap (see Note G).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

The following tables provide a reconciliation of GAAP net income and diluted earnings per share for the nine months ended September 30, 2004 and 2003. Management believes the non-GAAP financial measures presented are useful to investors in understanding the Company’s results of operations, because they provide more comparable measures:

The increase of 59.7% and 78.6% in diluted earnings per share for the three and nine months ended September 30, 2004, excluding the above items, reflects primarily improved operating results at ABF, as discussed below in the ABF section of Management’s Discussion and Analysis.

Reliance Insurance Company (“Reliance”) was Arkansas Best’s excess insurer for workers’ compensation claims above $300,000 for the years 1993 through 1999. According to an Official Statement by the Pennsylvania Insurance Department on October 3, 2001, Reliance was determined to be insolvent. The Company has been in contact with and has received either written or verbal confirmation from a number of state guaranty funds that they will accept excess claims. For claims not accepted by state guaranty funds, Arkansas Best has continually maintained reserves for its estimated exposure to the Reliance liquidation since 2001. During the second quarter of 2004, Arkansas Best began receiving notices of rejection from the California Insurance Guarantee Association (“CAIGA”) on certain claims previously accepted by this guaranty fund. If these claims are not covered by the CAIGA fund, they become part of Arkansas Best’s exposure to the Reliance liquidation. As of September 30, 2004, the Company estimated its workers’ compensation claims insured by Reliance to be approximately $7.7 million. Of the $7.7 million of insured Reliance claims, approximately $3.4 million have been accepted by state guaranty funds, leaving the Company with a net exposure amount of approximately $4.3 million. At September 30, 2004, the Company had reserved $3.7 million in its financial statements for its estimated exposure to Reliance. The Company’s reserve was determined by reviewing the most recent financial information available for Reliance from the Pennsylvania Insurance Department. The Company anticipates receiving either full reimbursement from state guaranty funds or partial reimbursement through orderly liquidation; however, this process could take several years.

On August 1, 2001, the Company sold the stock of G.I. Trucking Company (“G.I. Trucking”) for $40.5 million in cash to a company formed by the senior executives of G.I. Trucking and Estes Express Lines (“Estes”). The Company retained ownership of three California terminal facilities and has agreed to lease them for an aggregate amount of $1.6 million per year to G.I. Trucking for a period of up to four years. G.I. Trucking has an option at any time during the four-year lease term to purchase these terminals for $19.5 million. The terminals may be purchased in aggregate or individually. The facilities have a net book value of approximately $5.4 million. If all of the terminal facilities are sold to G.I. Trucking, the Company will recognize a pre-tax gain of approximately $14.1 million in the period they are sold.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

ABF Freight System, Inc.

Effective June 14, 2004 and July 14, 2003, ABF implemented general rate increases to cover known and expected cost increases. Typically, the increases were 5.9% for both periods, although the amounts can vary by lane and shipment characteristic. ABF's increase in reported revenue per hundredweight, net of fuel surcharge, for the third quarter of 2004 versus the same period in 2003 has been impacted not only by the general rate increase, but also by changes in profile such as length of haul, weight per shipment and customer mix. ABF charges a fuel surcharge, based on changes in diesel fuel prices compared to an index price. The ABF fuel surcharge rate in effect is available on the ABF Web site at www.abf.com. The fuel surcharge in effect averaged 6.0% and 5.2% of revenue for the three and nine months ended September 30, 2004, compared to 3.2% and 3.5% for the same periods in 2003. The current fuel surcharge in effect on less-than-truckload shipments weighing less than 20,000 pounds as of November 3, 2004 is 12.9%.

As previously discussed, the 2003 statement of income includes a reclassification to report revenue and purchased transportation expense, on a gross basis, for certain shipments where ABF utilizes a third-party carrier for pickup or delivery of freight, but remains the primary obligor. The amounts reclassified were $7.5 million and $21.0 million for the three and nine months ended September 30, 2003. The comparable amounts for the same periods in 2004 were $7.5 million and $21.3 million, respectively. There was no impact on ABF’s operating income and only a slight impact on ABF’s operating ratio as a result of this reclassification.

Revenues for the three and nine months ended September 30, 2004 were $427.9 million and $1,165.1 million compared to $368.1 million and $1,042.9 million for the same periods in 2003. ABF generated operating income of $46.2 million and $87.7 million for the three and nine months ended September 30, 2004 compared to $29.3 million and $55.0 million during the same periods in 2003.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) — continued

The following table provides a comparison of key operating statistics for ABF: