PAM TRANSPORTATION SERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NO. 0-15057

P.A.M. TRANSPORTATION SERVICES, INC.
(Exact name of registrant as specified in its charter)

Delaware 71-0633135
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

Highway 412 West
P.O. Box 188
Tontitown, Arkansas 72770
(501) 361-9111
(Address of principal executive offices, including zip code,
and telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: Common Stock, $.01
par value

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

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant on March 19, 1998 was $22,302,982. Solely for
the purposes of this response, executive officers, directors and beneficial
owners of more than five percent of the Company's common stock are considered
the affiliates of the Company at that date.

The number of shares outstanding of the issuer's common stock, as of March 19,
1998: 8,299,150 shares of $.01 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in 1998 is incorporated by reference in answer to Part
III of this report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.

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Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results and plans for future business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, general economic conditions, competition in the
transportation industry, fuel prices, availability of drivers, extreme weather
conditions and other uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.

PART I

ITEM 1. BUSINESS.

P.A.M. Transportation Services, Inc. (the "Company"), operating through
its wholly-owned subsidiaries, is an irregular route, common and contract motor
carrier authorized to transport general commodities throughout the continental
United States and the Canadian provinces of Ontario and Quebec, pursuant to
operating authorities granted by the former Interstate Commerce Commission
("ICC"), various state regulatory agencies and Canadian regulatory agencies.
Under its operating authorities, the Company may transport all types of freight
(except household goods, commodities in bulk and certain explosives) intrastate
within any state, and from any point in the continental United States, Ontario
or Quebec to any other point in the continental United States or in Ontario or
Quebec over any route selected by the Company. The Company transports dry
freight commodities ("freight") in 48-foot and 53-foot long, high cube
conventional and specialized freight vans ("trailers"). The freight consists
primarily of automotive parts, consumer goods, such as general retail store
merchandise and products from the manufacturing sector, such as heating and air
conditioning units, and industrial glass. All freight is transported as
truckload quantities.

The Company is a holding company organized under the laws of the State
of Delaware in June 1986 and conducts its operations through its wholly-owned
subsidiaries, P.A.M. Transport, Inc. ("P.A.M. Transport"), P.A.M. Special
Services, Inc., T.T.X., Inc., P.A.M. Dedicated Services, Inc., P.A.M. Logistics
Services, Inc., Choctaw Express, Inc., Choctaw Brokerage, Inc. and Allen Freight
Services, Inc. The Company's operating authorities are held by P.A.M. Transport,
P.A.M. Dedicated Services, Inc., Choctaw Express, Inc., Choctaw Brokerage, Inc.
and Allen Freight Services, Inc. Although not organized until June 1986, the
Company is, for financial accounting purposes, the successor to P.A.M.
Transport, which was organized under the laws of the State of Arkansas in 1980.
Unless the context otherwise requires, all references to the Company in this
Annual Report on Form 10-K include P.A.M. Transportation Services, Inc. and its
subsidiaries. At December 31, 1997, the Company operated a transport fleet
consisting of 975 over-the-road tractors ("tractors") and 2,678 trailers.

The Company is headquartered and maintains its primary terminal,
maintenance facilities and corporate and administrative offices in Tontitown in
the northwest corner of Arkansas, a major center for the trucking industry and
where the support services (including warranty repair services) of most major
tractor and trailer equipment manufacturers are readily available.

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MARKETING/MAJOR CUSTOMERS

The Company's marketing emphasis is directed to that segment of the
truckload market which is generally service-sensitive, as opposed to being
solely price competitive. Since 1990, the Company has diversified its marketing
efforts to gain access to non-traditional freight traffic, including
international (Mexico and Canada), domestic regional short-haul, dedicated fleet
services and intermodal transportation. The Company also participates in various
"core carrier" partnerships with its larger customers. The Company estimates
that approximately 60% of its deliveries to customers are made on a JIT ("just
in time") basis, whereby products and raw materials are scheduled for delivery
as they are needed on the retail customer's shelves or in the manufacturing
customer's production line. Such requirements place a premium on the freight
carrier's delivery performance and reliability. With respect to these JIT
deliveries, approximately 50% require the use of two-man driver teams to meet
the customer's schedule. The need for this service is a product of modern
manufacturing and assembly methods which are designed to drastically decrease
inventory levels and handling costs.

The Company's marketing efforts are conducted by seven outside sales
persons domiciled within the Company's major markets. Field personnel are
supervised from Company headquarters, emphasizing an even flow of freight
traffic (balance between originations and destinations in a given geographical
area) and minimization of movement of empty equipment.

During 1997, the Company's five largest customers, for which the Company
provides carrier services covering a number of geographic locations, accounted
for approximately 50% of total revenues. General Motors Corporation accounted
for approximately 25% of 1997 revenues and Packard Electric accounted for
approximately 12% of 1997 revenues. A total loss of General Motors or Packard
Electric business, however unlikely, would have an adverse impact on the
Company's operations, at least over the short term.

The Company also provides transportation services to other manufacturers
who are suppliers for automobile manufacturers including General Motors. As a
result, concentration of the Company's business within the automobile industry
is greater than the concentration in a single customer. Of the Company's
revenues for 1997 which were attributable to its top ten customers,
approximately 41% were derived from transportation services provided to the
automobile industry.

The Company is no longer required to file tariffs with the Interstate
Commerce Commission ("ICC") or any successor agency. See "Regulation."

OPERATIONS

The Company maintains 24-hour dispatch offices at its headquarters, as
well as its offices in Oklahoma City, Oklahoma, Jacksonville, Florida and
Warren, Ohio, with a toll free WATS line to facilitate communications with both
customers and drivers. The location, status and contact assignment of all of the
Company's equipment are available on an up-to-date basis through the Company's
computer system, which permits the Company to better meet delivery schedules,
respond to customer inquiries and match equipment with the next available load.

In early 1996, the Company began installing Qualcomm Omnitracs(TM)
display units in its tractors. The Omnitracs system is a satellite-based global
positioning and communications system that allows fleet managers to communicate
directly with drivers. Drivers can provide location status and updates directly
to

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the customer's computer, saving telephone usage cost, lost productivity, and
inconvenience. The Omnitracs system provides customer service with accurate
estimated time of arrival information which optimizes load selection and service
levels to the Company's customers. At the end of 1997, substantially all of the
Company's tractors were equipped with these units and full implementation is
expected in early 1998.

The Company communicates through electronic data interchange with many
of its customers, providing live status reports of freight shipments and arrival
time information. This system provides the Company's customers flexibility and
convenience by allowing the customer to tender freight electronically.

The Company has contractual arrangements with some customers to move
freight in dedicated lanes within the United States. A majority of this freight
is moved on a round-trip basis, and due to the volume involved, the Company has
agreed to dedicate equipment and personnel to handle this part of its business.
The Company has found that dedicated service promotes increased utilization of
equipment and greater driver satisfaction due to the greater regularity of the
routes and schedules, which allows the drivers to be at home more often. There
exists a large volume of dedicated-type business throughout the continental
United States. The Company has enjoyed considerable success in entering this
market, and is aggressively seeking to expand its share of the dedicated
services market.

INTERMODAL SERVICE

The Company entered the intermodal transportation business in 1992, and
has contractual arrangements with Consolidated Rail Corporation ("Conrail"),
Norfolk Southern, the Atchison, Topeka and Santa Fe Railway Company ("Santa
Fe"), Burlington Northern, Union Pacific, Illinois Central, and CSX Intermodal
("CSX"). Intermodal service provides customers with an alternative to highway
long-hauls. Management expects to take advantage of opportunities to expand this
business and views the intermodal market as a mechanism to realize non-asset
based revenue growth.

OVER-THE-ROAD EQUIPMENT

The Company operated a fleet of 975 tractors and 2,678 trailers at
December 31, 1997. All of the trailers and all except 94 tractors are owned or
leased by the Company. The trailer fleet is made up of 863 48' by 102" dry vans
and 1,815 53' by 102" dry vans. In 1993, the Company began its trailer fleet
conversion to air ride equipment and the Company intends to purchase only air
ride trailers in the future. The Company also has certain specialized drop-frame
trailers. The tractors that are not Company owned are leased from
owner/operators on a per mile basis.

At the end of the respective years, the average age of the Company's
tractors was 1.26 in 1995, 1.85 in 1996, and 1.94 in 1997. The average age of
the Company's trailer fleet was 2.34, 2.60 and 2.85 at the end of 1995, 1996 and
1997, respectively.

During 1997, the Company purchased 242 new tractors and 127 new trailers
and disposed of 160 tractors and 162 trailers. During 1998, the Company expects
to purchase 495 new tractors and 700 new trailers while continuing to sell or
trade older equipment.

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MAINTENANCE

The Company has a strictly enforced comprehensive preventive maintenance
program for the tractors and trailers it operates. Inspections and various
levels of repair and preventive maintenance are performed at set mileage
intervals on both tractors and trailers. Although a significant portion of
maintenance is performed at the Company's maintenance facility in Tontitown,
Arkansas, the Company's subsidiaries have additional maintenance facilities in
Warren, Ohio; Springfield, Missouri; Dallas, Laredo and El Paso, Texas; Oklahoma
City, Oklahoma; and Columbia, Mississippi. These facilities enhance the
Company's preventive and routine maintenance operations and are strategically
located on major transportation routes where a majority of the Company's freight
originates and terminates. A maintenance and safety inspection is performed on
all vehicles each time they return to a terminal. The Company's primary
maintenance facilities consist of thirteen mechanical repair bays, four bodyshop
bays and three safety and maintenance inspection bays. The Company believes that
its current maintenance facilities will be adequate to accommodate its fleet for
the foreseeable future.

The Company's tractors carry full warranty coverages of at least 100,000
miles. Extended warranties are negotiated with the manufacturer and major
component manufacturer (i.e., engine, transmission, differential) for up to
1,000,000 miles. Trailers are also warranted by the manufacturer and major
component manufacturer for up to five years.

Manufacturers of tractors are required to certify that new tractors meet
federal emission standards and the Company receives such certifications on each
new tractor it acquires. Certain governmental regulations require the Company to
adhere to a fuel and oil spillage prevention plan and to comply with regulations
concerning the discharge and disposal of waste oil. The Company believes it is
in compliance with applicable waste disposal and emission regulations. The
Company also maintains insurance to cover clean up expense in the event of a
spill.

DRIVERS

At December 31, 1997, the Company utilized 1,175 drivers in its
operations. All drivers are recruited, screened, drug tested and trained and are
subject to the control and supervision of the Company's operations and safety
departments. The Company's driver training program stresses the importance of
safety and reliable, on-time delivery. Drivers are required to report to their
dispatchers daily and at the earliest possible moment when any condition en
route occurs which might delay their scheduled delivery time.

The Company has established relationships with recruiting and training
schools in Indiana, Missouri, and Arkansas to enhance its ability to secure the
services of qualified drivers. The Company agrees to pay a student's costs for
attending the training school so long as the student fulfills a commitment to
work for the Company for at least twelve months. Drivers who fail to complete
their 12 month commitment are required to reimburse all or a portion of the
Company's costs in training the driver, depending upon the date of termination
of employment.

The Company's drivers are selected only after strict application
screening and drug testing. Before being permitted to operate a vehicle for the
Company, drivers must undergo classroom instruction on Company policies and
procedures, safety techniques and proper operation of equipment and then must
pass both written and road tests. Instruction in defensive driving and safety
techniques continues after hiring, with the Company holding seminars at its
terminals in Tontitown, Arkansas, Oklahoma City, Oklahoma,

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Jacksonville, Florida, Warren, Ohio, and Columbia, Mississippi. The Company
currently employs approximately 38 persons on a full-time basis in its driver
recruiting, training and safety instruction programs.

The Company's drivers are compensated on the basis of miles driven,
loading and unloading, extra stop pay and layovers in transit. Drivers can earn
bonuses by recruiting other qualified drivers who are employed by the Company
and both cash and non-cash prizes are awarded for consecutive periods of safe,
accident-free driving.

Intense competition in the trucking industry for qualified drivers over
the last several years, along with difficulties and added expense in recruiting
and retaining qualified drivers, has had a negative impact on the industry. The
Company's operations have also been impacted and from time to time the Company
has experienced under-utilization and increased expenses due to a shortage of
qualified drivers. Management places the highest of priorities on the
recruitment and retention of an adequate supply of qualified drivers.

EMPLOYEES

At December 31, 1997, the Company employed 1,446 persons, of which 1,175
are drivers, 69 are maintenance personnel, 80 are employed in operations, 29 are
employed in marketing, 38 are employed in safety and personnel, and 55 are
employed in general administration and accounting. Of the total number of
employees, 166 of the Company's employees are salaried, and the remainder are
employed on an hourly or mileage basis. The Company also has 94 owner/operators
under contract who are compensated on a per mile basis. None of these employees
are represented by a collective bargaining unit and the Company believes that
its employee relations are good.

REGULATION

The Company is a common and contract motor carrier that is regulated by
certain state and Canadian regulatory agencies. Prior to January 1, 1996, the
Company was also regulated by the ICC. The ICC governed such activities as the
authority to engage in motor carrier operations, rates and charges, accounting
systems, certain mergers, consolidations, acquisitions and periodic financial
reporting. On January 1, 1996, however, the ICC Termination Act of 1995 (the
"Termination Act") was enacted, terminating the ICC and substantially
deregulating the rail and motor carrier industries.

The Termination Act substantially revises the Motor Carrier Act of 1980,
eliminating numerous unnecessary provisions and streamlining many of the ICC's
functions regarding the regulation of the motor carrier industry. The majority
of the remaining ICC functions are transferred to the Department of
Transportation ("DOT"), with limited responsibilities transferred to a newly
formed Surface Transportation Board. Some of the ICC functions that have been
eliminated include: tariff filings, except for non-contiguous domestic trade;
rate regulation, except for non-contiguous domestic trade and individual
household goods movements; federal grants of operating authority; price
regulation and tariff filing requirements for office and exhibit moves; the
possibility of future undercharge claims; restrictions on intermodal ownership;
review of motor carrier mergers; and state regulation of transportation
intermediaries. In addition, registration and insurance filings under the Motor
Carrier Act are streamlined into a single federal registration and insurance
system to eliminate duplicative and burdensome filing requirements. Exemption
authority to permit administrative deregulation has also been substantially
broadened, with restrictions remaining on only cargo loss and damage, insurance,
safety fitness and antitrust immunity.

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Prior to the enactment of the Termination Act, most of the ICC's
authority to oversee the commercial operation of the motor carrier industry had
already been transferred to the DOT. The primary remaining functions which are
transferred to the DOT by the Termination Act are motor carrier registration and
the setting and maintenance of minimum levels of liability insurance. In
addition, the maintenance of nationwide motor carrier industry commercial rules
(such as leasing rules, uniform cargo loss and damage rules, rules for shipper
payment, and perfecting security interests) are transferred to the DOT.

Currently, the ICC and the DOT operate separate registration systems.
The ICC requires that interstate, for hire carriers receive a license (operating
authority) with the standards for granting of authority limited to a showing of
safety and fitness and insurance coverage at a specified level. The DOT
registration system extends to all carriers, including private and exempt
carriers not regulated by the ICC. DOT assigns each carrier an identification
number. Carriers are not required to show proof of insurance at the time of DOT
registration, nor is any fee currently charged. The Termination Act continues
the two registration systems for a period of twenty-four months, during which
time the Secretary of Transportation shall conduct a rule-making and implement
changes to consolidate these two registration systems into one system. The new
system will serve as a clearing house and depository of information on and
identification of all domestic and foreign motor carriers, brokers, freight
forwarders and others required to register. The DOT will utilize the information
in overseeing safety fitness and compliance with required levels of insurance.
Registrations will be renewed periodically and the on-line system will be
available to state authorities and the public.

The Termination Act also continues antitrust immunity granted by the ICC
but contains reforms intended to prevent any potential market abuses.

On January 1, 1995, federal legislation went into effect eliminating
intrastate regulation of motor carrier operations. This action allows the
Company to better compete for intrastate business, possibly reducing empty
miles, and should result in more comprehensive service to the Company's existing
customers.

Motor carrier operations are also subject to safety requirements
prescribed by the United States Department of Transportation governing
interstate operation. Such matters as weight and dimensions of equipment are
also subject to federal and state regulations.

The Company believes that it is in compliance in all material respects
with applicable regulatory requirements relating to its trucking business and
operates with a satisfactory rating from the United States Department of
Transportation.

COMPETITION

The trucking industry is highly competitive. The Company competes
primarily with other irregular route long-haul truckload carriers, with private
carriage conducted by its existing and potential customers, and, to a lesser
extent, with the railroads. Increased competition has resulted from deregulation
of the trucking industry and has generally exerted downward pressure on prices.
The Company competes on the basis of its quality of service and delivery
performance as well as price. Many of the other irregular route long-haul
truckload carriers have substantially greater financial resources, own more
equipment or carry a larger total volume of freight than the Company.

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EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

Name Position with Company
----------------- ---------------------------------------

Robert W. Weaver President and Chief Executive Officer

W. Clif Lawson Executive Vice President and Chief
Operating Officer

Larry J. Goddard Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer

ROBERT W. WEAVER, age 48, is a co-founder of the Company and served as
its Vice President from March 1980 to June 1986. He was President and Chief
Operating Officer from June 1986 until he resigned in February 1987. Between
February 1987 and September 1989, he was self-employed as a transportation
consultant. In September 1989, Mr. Weaver returned to the Company as President
and Chief Operating Officer and a director. On February 22, 1990, he was
appointed Chief Executive Officer.

W. CLIF LAWSON, age 44, has been Executive Vice President of the Company
since August 1989 and Chief Operating Officer since March 1992. He joined the
Company in June 1984 and served in various operations and sales capacities until
August 1989.

LARRY J. GODDARD, age 39, has been Vice President-Finance and Chief
Financial Officer since January 1991 and served as Controller of the Company
from May 1989 to January 1991. In addition, he has served as Secretary since
September 1989, and Treasurer since May 1991. From November 1987 to May 1989, he
served as General Accounting Manager of the Company.

ITEM 2. PROPERTIES.

The Company's executive offices and primary terminal facilities are
located in Tontitown, Arkansas. The Company's facilities are located on
approximately 45 acres and consist of 79,193 square feet of office space and
maintenance and storage facilities. The Company's facilities in Tontitown are
owned by the Company.

The Company's subsidiaries also lease terminal facilities in
Jacksonville, Florida; Warren, Ohio; Springfield, Missouri; Laredo, El Paso,
and Dallas, Texas; Memphis, Tennessee; and Oklahoma City, Oklahoma; the
terminal facilities in Columbia, Mississippi are owned. These facilities are
leased primarily on a month-to-month basis, and provide on-the-road maintenance
and trailer drop and relay stations. The Company's subsidiaries also lease an
aggregate of 25 other locations as trailer drop and relay stations only.

The Company has access to trailer drop and relay stations in various
locations across the country. Certain of these facilities are leased by the
Company on a month-to-month basis from an affiliate of its majority shareholder.

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The Company believes that all of the properties owned or leased by the
Company are suitable for their purposes and adequate to meet the Company's
needs.

ITEM 3. LEGAL PROCEEDINGS.

The nature of the Company's business routinely results in litigation,
primarily involving claims for personal injuries and property damage incurred in
the transportation of freight, and management of the Company believes all such
litigation is adequately covered by insurance and that adverse results in one or
more of those cases would not have a material adverse effect on the Company's
financial condition.

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

No matters were submitted to a vote of security holders of the Company
during the fourth quarter ended December 31, 1997.

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PART II

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

The Company's Common Stock is traded on the Nasdaq National Market
System under the Nasdaq symbol PTSI. The following table sets forth, for the
fiscal quarters indicated, the range of the high and low sales price per share
for the Common Stock as quoted on the Nasdaq National Market System.

First Year Ended December 31, 1997 High Low
- ---------------------------------- ---- ---

First Quarter $ 7 1/4 $4 3/8

Second Quarter 8 1/2 5 1/4

Third Quarter 10 1/8 7 7/8

Fourth Quarter 12 1/4 7 3/4

Fiscal Year Ended December 31, 1996 High Low
- ----------------------------------- ---- ---

First Quarter $ 8 1/8 $6 5/8

Second Quarter 7 7/8 6 1/4

Third Quarter 7 6 1/8

Fourth Quarter 6 1/4 4

As of March 19, 1998, the number of stockholders of record was
approximately 386. The Company has not declared or paid any cash dividend on its
Common Stock. The policy of the Board of Directors of the Company is to retain
earnings for the expansion and development of the Company's business. Future
dividend policy and the payment of dividends, if any, will be determined by the
Board of Directors in light of circumstances then existing, including the
Company's earnings, financial condition and other factors deemed relevant by the
Board of Directors.

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ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere
herein.

Years ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share amounts)

Statements of Operations:
Operating revenues $127,211 $113,021 $ 91,595 $76,147 $70,238
-------- -------- -------- ------- -------
Operating Expenses:
Salaries, wages and benefits 57,662 52,444 40,020 33,647 31,850
Operating supplies 24,666 21,909 16,719 14,688 16,393
Rent and purchased transportation 1,655 1,824 1,538 991 1,599
Depreciation and amortization 12,995 11,999 9,428 7,142 4,683
Operating taxes and licenses 7,581 6,734 5,608 5,078 4,680
Insurance and claims 5,571 5,004 4,163 3,816 3,686
Communications and utilities 1,001 1,090 852 868 864
Other 2,394 2,077 1,666 1,279 1,430
(Gain) loss on sale or disposal of
property and equipment 71 375 159 (334) (246)
-------- -------- -------- ------- -------
Total operating expenses 113,596 103,456 80,153 67,175 64,939
-------- -------- -------- ------- -------

Operating income 13,615 9,565 11,442 8,972 5,299
Interest expense (3,423) (4,137) (3,521) (2,926) (1,972)
Other 0 31 166 217 122
-------- -------- -------- ------- -------

Income before income taxes and
dividends on redeemable preferred stock 10,192 5,459 8,087 6,263 3,449
Income taxes 3,892 2,147 3,073 2,493 321
-------- -------- -------- ------- -------

Income before dividends on
redeemable preferred stock 6,300 3,312 5,014 3,770 3,128
Accrued dividends on redeemable
preferred stock 0 0 0 30 360
-------- -------- -------- ------- -------
Net income $ 6,300 $ 3,312 $ 5,014 $ 3,740 $ 2,768
======== ======== ======== ======= =======

Earnings per common share:
Basic $ .77 $ .66 $ 1.01 $ .76 $ .57
======== ======== ======== ======= =======
Diluted $ .76 $ .44 $ .65 $ .50 $ .39
======== ======== ======== ======= =======

Average common shares outstanding - Basic 8,192 5,035 4,970 4,921 4,876
======== ======== ======== ======= =======

Average common shares outstanding - Diluted 8,290(1) 7,578(1) 7,654(1) 7,520(1) 7,335(1)
======== ======== ======== ======= =======

=====

- --------------------

(1) Income per share for 1997, 1996, 1995, 1994 and 1993 assumes the exercise
of stock purchase warrants and stock options to purchase an aggregate of
347,850, 3,271,280, 3,529,278, 3,454,549 and 3,434,429 shares of Common Stock,
respectively.

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Balance Sheet Data
------------------

At December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)

Total assets $100,688 $94,895 $86,808 $65,324 $56,140
Long-term debt 28,226 34,938 37,966 32,206 28,650
Redeemable preferred stock 0 0 0 0 4,397
Shareholders' equity 33,162 26,312 18,232 13,034 9,155

Operating Data
--------------

For the Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)

Operating ratio(1) 89.3% 91.5% 87.5% 88.2% 92.5%
Average number of truckloads per week 2,874 2,437 1,913 1,617 1,633
Average miles per trip 786 845 899 859 794
Total miles traveled (in thousands) 115,622 102,946 85,588 69,128 64,879
Average miles per tractor 125,404 122,250 118,424 116,181 114,830
Average revenue per tractor per week $ 2,694 $ 2,684 $ 2,711 $ 2,668 $ 2,462
Average revenue per loaded mile $ 1.17 $ 1.17 $ 1.14 $ 1.18 $ 1.16
Empty mile factor 5.8% 6.1% 6.2% 6.8% 6.9%

AT END OF PERIOD:
Total Company-owned/leased tractors 975(2) 912(3) 716(4) 595(5) 565(6)
Average age of all tractors (in years) 1.94 1.85 1.26 1.70 3.04
Total trailers 2,678(7) 2,398(8) 1,638(9) 1,434(8) 1,512(10)
Average age of trailers (in years) 2.85 2.60 2.34 2.09 3.84
Number of employees 1,446 1,438 1,192 859 945

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(1) Total operating expenses as a percentage of total operating revenues.
(2) Includes 94 owner operator tractors.
(3) Includes 126 owner operator tractors.
(4) Includes 45 owner operator tractors.
(5) Includes 40 owner operator tractors.
(6) Includes 34 owner operator tractors.
(7) Includes 66 trailers leased from an affiliate of the Company's majority
shareholder.
(8) Includes 74 trailers leased from an affiliate of the Company's majority
shareholder.
(9) Includes 82 trailers leased from an affiliate of the Company's majority
shareholder.
(10) Includes 266 trailers leased from an affiliate of the Company's majority
shareholder.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following table sets forth the percentage relationship of revenue
and expense items to operating revenues for the periods indicated.

Percentage of Operating Revenues
--------------------------------

Years ended December 31,
--------------------------------
1997 1996 1995
---- ----- -----

Operating revenues 100% 100% 100%
---- ----- -----

Operating expenses:
Salaries, wages and benefits 45.3 46.4 43.7
Operating supplies 19.4 19.4 18.3
Rent and purchased transportation 1.3 1.6 1.7
Depreciation and amortization 10.2 10.6 10.3
Operating taxes and licenses 6.0 6.0 6.1
Insurance and claims 4.4 4.4 4.5
Communications and utilities 0.8 1.0 0.9
Other 1.9 1.8 1.8
(Gain) loss on sale or disposal
of property and equipment 0.2 0.3 0.2
----- ----- -----
Total operating expenses 89.5 91.5 87.5
----- ----- -----
Operating income 10.5 8.5 12.5
Interest expense (2.7) (3.6) (3.8)
Other, net -- -- .2
----- ----- -----
Income before income taxes and dividends
on redeemable preferred stock 7.8 4.9 8.9
Federal and state income taxes (3.0) (1.9) (3.4)
----- ----- ------
Income before dividends on redeemable
preferred stock 4.8 3.0 5.5
Accrued dividends on redeemable preferred
stock -- -- --
----- ----- -----

Net income 4.8 3.0 5.5
===== ===== =====

RESULTS OF OPERATIONS

1997 COMPARED TO 1996

For the year ended December 31, 1997, revenues increased 12.6% to $127
million as compared to $113.0 million for the year ended December 31, 1996. The
Company's utilization (revenue per tractor per work day) increased .37% from
$537 in 1996 to $539 in 1997.

13

14

The Company's operating ratio improved from 91.5% in 1996 to 89.3% in
1997.

Salaries, wages and benefits decreased from 46.4% of revenues in 1996 to
45.3% in 1997. The major factor for the decrease was a 1.8% decrease in the
amounts paid to fleet owners of Allen Freight Services, Inc. ("AFS"). This
decrease was partially offset, however, by an increase of 0.6% in amounts paid
to AFS company drivers who replaced AFS fleet owners.

Interest expense decreased $714,507 in 1997 when compared to 1996,
primarily as a result of the Company reducing its long term debt and its
borrowings under its line of credit during the fourth quarter of 1996. This
reduction was accomplished by using $4.6 million in proceeds received by the
Company in connection with the exercise of stock purchase warrants by the
Company's majority shareholder.

The Company's effective tax rate decreased from 39.3% in 1996 to 38.2%
in 1997 as a result of discontinuing the practice of reimbursing nondeductible
per diem expenses to AFS company drivers. The Company's effective tax rate
reflects the statutory federal tax rate and the average tax rate of the states
in which the Company conducts business.

At December 31, 1997, the Company's deferred tax assets were $6.4
million and deferred tax liabilities were $15.7 million. In assessing the need
for a valuation allowance against deferred tax assets at December 31, 1997,
management considered the following factors: 1) the Company has recorded $9.3
million in deferred tax liabilities for future taxable temporary differences
(primarily depreciation related) which will result in additional taxable income
in future periods; 2) the Company's recent operating results have produced a
total of more than $23.7 million of pretax accounting income for 1997, 1996 and
1995 and net operating loss carryovers have offset all taxable income (total of
$4.1 million) in these years; 3) the Company has various alternatives, such as
equipment leasing to utilize net operating losses, which might otherwise expire;
and 4) the Company's carryover periods for its deferred tax assets are
extensive, with expiration beginning in 2003 for net operating losses and 1999
for investment credits.

1996 COMPARED TO 1995

For the year ended December 31, 1996, revenues increased 23.4% to $113.0
million as compared to $91.6 million for the year ended December 31, 1995. The
main factor for the increase in revenues was an increase in average tractors
from 658 in 1995 to 843 in 1996, of which 162 were added in connection with the
acquisition of AFS. AFS produced revenues of $15.0 million from the acquisition
date to December 31, 1996.

The Company's operating ratio was 91.5% of revenues in 1996 compared to
87.5% in 1995.

Salaries, wages and benefits increased from 43.7% of revenues in 1995 to
46.4% in 1996. The major factor for the increase was a 2.6% increase in expense
attributable to wages paid to AFS fleet owners, which are higher than wages paid
to Company drivers.

Operating supplies and expenses increased from 18.3% of revenues in 1995
to 19.3% of revenues in 1996, reflecting increased fuel costs for 1996.

Interest expense increased approximately $616,000 in 1996 when compared
to 1995, primarily as a result of borrowings associated with new equipment
purchases and an increased line of credit balance

14

15

throughout the year.

The Company's effective tax rate increased from 38% in 1995 to 39.3% in
1996, as a result of AFS' practice of paying per diem expenses to its drivers, a
portion of which is a nondeductible permanent difference in the calculation of
income tax expense. Per diems are no longer paid to AFS drivers effective July
1, 1996.

LIQUIDITY AND CAPITAL RESOURCES

During 1997, the Company generated $25.0 million in cash from operating
activities. The ratio of current assets to current liabilities was 1.0 at the
end of 1997, compared to 1.0 and 1.1 at the end of 1996 and 1995, respectively.

Investing activities used $16.5 million in cash in 1997 compared to
$16.8 million and $22.1 million in 1996 and 1995, respectively. The cash used in
all three years related primarily to the purchase of revenue equipment used in
the Company's operations.

Financing activities used $8.0 million in cash in 1997 primarily to pay
off long-term debt and pay down line of credit borrowings.

The Company's principal subsidiary, P.A.M. Transport, Inc., has a $15.0
million secured bank line of credit subject to borrowing limitations. The line
of credit includes a provision that allows the Company to finance equipment at a
reduced interest rate of LIBOR plus 1.75% (currently 7.47%). The maximum amount
of equipment that may be financed under this equipment provision is $7.5 million
with the remaining $7.5 million representing a general "working capital" line of
credit at an interest rate of LIBOR plus 2.15% (currently 7.87%). Outstanding
advances on this line of credit were approximately $6.7 million at December 31,
1997, including $1.5 million in letters of credit. The Company's borrowing
limitation at December 31, 1997 was $4.8 million. This line of credit is
guaranteed by the Company and matures May 31, 1999. The line of credit agreement
contains restrictive covenants which require the Company to maintain a net worth
of $12.5 million and a debt service coverage ratio of not less than 1.0 to 1.0.
The line of credit agreement also includes restrictions on dividend payments and
certain corporate acts such as mergers and consolidations. At December 31, 1997,
the Company was in compliance with all such covenants.

In addition to cash flow from operations, the Company uses its existing
line of credit on an interim basis to finance capital expenditures and repay
long-term debt. Although longer-term obligations, such as installment notes
(generally three and four year terms at fixed rates) are typically entered into
for the

15

16

purchase of revenue equipment; the Company purchased such equipment during 1997
using its existing line of credit. The cost of this equipment was approximately
$5.7 million. Two subsidiaries of the Company, P.A.M. Transport and P.A.M.
Dedicated Services, Inc., entered into installment obligations during 1997 for
the purchase of replacement revenue equipment which totaled approximately $10.9
million and $1.7 million, respectively, payable in 36 and 48 monthly
installments, respectively, at interest rates ranging from 7.50% to 7.60%. The
Company's weighted average interest rates on all borrowings were 7.69%, 7.67%
and 7.9% for 1997, 1996 and 1995, respectively.

During 1997, the Company sold or traded revenue equipment for
approximately $4.6 million. The Company plans to replace 300 trailers and 355
tractors, and to add 140 additional new tractors and 400 additional new trailers
during 1998, which would result in additional debt of approximately $41.2
million. Management expects that the Company's existing working capital and its
available line of credit will be sufficient to meet the Company's capital
commitments as of December 31, 1997, to repay indebtedness coming due in the
current year, and to fund its operating needs during fiscal 1998.

INSURANCE

With respect to cargo loss, collision and auto liability, P.A.M.
Transport, P.A.M. Dedicated Services, Inc., and Choctaw Express, Inc. are
covered under the same insurance policy. The policy's auto liability and
collision coverage are subject to a $2,500 deductible per occurrence while the
cargo loss coverage has a $1,000 deductible. With respect to AFS, its auto
liability coverage is not subject to a deductible while the collision deductible
for tractors and trailers are $2,500 and $500, respectively, per occurrence.
AFS's cargo loss coverage is subject to a deductible of $5,000 per occurrence.
The Company maintains a reserve for estimated losses for claims incurred, and
maintains a reserve for claims incurred but not reported (based on the Company's
historical experience). As of July 1, 1994, the Company became self-insured for
workers' compensation, with excess coverage maintained for claims exceeding
$250,000 in Arkansas, Oklahoma, Ohio, Mississippi and Florida. Prior to July 1,
1994, the Company maintained an insurance policy for worker's compensation with
a deductible of $350,000 per occurrence. The Company has reserved for estimated
losses to pay such claims as incurred. Additionally, a reserve has been
estimated for those claims incurred but not reported. The Company has not
experienced any adverse trends involving differences in claims experienced
versus claims estimates for workers' compensation reserves. The Company
contracts with a third-party licensed associate of risk management and a
certified Hazard Control Manager to develop its workers' compensation reserves
using the Company's historical data of past injuries. Letters of credit in the
amounts of $300,000, $200,000, $250,000, and $500,000 are held by a bank as
security for workers' compensation claims in Arkansas, Oklahoma, Mississippi,
and Florida, respectively, and letters of credit in the amounts of $100,000 and
$150,000 are held by a bank for auto liability claims.

SEASONALITY

The Company's revenues do not exhibit a seasonal pattern, due primarily
to its varied customer mix. Operating expenses are generally somewhat higher in
the winter months, primarily due to decreased fuel efficiency and increased
maintenance costs in cold weather.

16

17

ENVIRONMENTAL

The Company has no outstanding inquiries with any federal or state
environmental agency at December 31, 1997.

INFLATION

Inflation has an impact on most of the Company's operating costs.
Recently, the effect of inflation has been minimal.

Competition for drivers has increased in recent years, leading to
increased labor costs. While increases in fuel and driver costs affect the
Company's operating costs, the effects of such increases are not greater for the
Company than for other trucking concerns.

YEAR 2000

In the next two years, many companies may face a potentially serious
information systems problem because their computer software applications and
operational programs may not properly recognize calendar dates beginning in the
year 2000. This problem could force computers to either shut down or provide
incorrect data or information. The Company began the process of identifying the
changes required to its computer programs and hardware in early 1997. Software
upgrades designed to correct the year 2000 problem are scheduled to be
implemented in mid-1998. The Company believes that it will timely meet its year
2000 compliance requirements, and does not presently anticipate the cost of
these software and hardware changes to have a material adverse impact on its
business, financial condition, or results of operations. However, there can be
no assurance that unforeseen difficulties or costs will not arise.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following statements are filed with this report:

Report of Independent Public Accountants

Consolidated Balance Sheets - December 31, 1997 and 1996

Consolidated Statements of Income - Years ended December 31,
1997, 1996 and 1995

Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows - Years ended December
31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements

17

18
Report of Independent Public Accountants

To The Board of Directors and Shareholders of
P.A.M. Transportation Services, Inc.

We have audited the accompanying consolidated balance sheets of P.A.M.
Transportation Services, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits. The consolidated
financial statements of P.A.M. Transportation Services, Inc. and subsidiaries as
of and for the year ended December 31, 1995 were audited by other auditors whose
report dated February 14, 1996, expressed an unqualified opinion on those
statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of P.A.M.
Transportation Services, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index as item
14(a) is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Fayetteville, Arkansas
February 27, 1998

18
19

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders
P.A.M. Transportation Services, Inc.

We have audited the accompanying consolidated statement of income, shareholders'
equity and cash flows of P.A.M. Transportation Services, Inc. and subsidiaries
for the year ended December 31, 1995, and the related consolidated statements of
income, shareholders' equity, and cash flows for the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of P.A.M. Transportation Services, Inc. and subsidiaries for the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

Little Rock, Arkansas
February 14, 1996

19

20

P.A.M. Transportation Services, Inc.

Consolidated Balance Sheets

(thousands, except par value and per share information)

DECEMBER 31,
1997 1996
---------------------
ASSETS (NOTE 1)

Current assets:
Cash and cash equivalents $ 6,401 $ 5,941
Accounts receivable (Note 1):
Trade, net of allowance for doubtful accounts
(1997--$579; 1996--$579) 16,915 16,072
Other 1,703 1,030
Equipment held for sale (Note 1) 1,529 1,264
Operating supplies and inventories 449 382
Prepaid expenses and deposits 3,384 2,816
Deferred income taxes (Note 5) 61 --
Income taxes refundable (Note 5) 415 --
----------------------
Total current assets 30,857 27,505

Property and equipment (Notes 1,4,8 and 9):
Land 959 956
Structures and improvements 2,654 2,611
Revenue equipment 94,439 84,059
Service vehicles 2,024 1,804
Office furniture and equipment 3,496 3,164
---------------------
103,572 92,594
Allowances for depreciation and amortization (37,382) (29,714)
---------------------
66,190 62,880
Other assets:
Excess of cost over net assets acquired, net of
accumulated amortization (1997--$726; 1996--$615) 2,400 2,511

Non-competition agreements, net of accumulated
amortization (1997--$1,109; 1996--$668) 737 1,178
Other 504 821
---------------------
3,641 4,510
---------------------
Total assets $100,688 $94,895
=====================

20
21

DECEMBER 31,
1997 1996
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade accounts payable $ 9,233 $ 5,583
Accrued expenses (Note 3) 4,835 3,817
Deferred income taxes (Note 5) -- 65
Current portion of long-term debt (Notes 4 and 9) 15,544 16,849
------------------------------
Total current liabilities 29,612 26,314

Long-term debt, less current portion (Notes 4 and 9) 28,226 34,938

Deferred income taxes (Note 5) 9,376 6,569

Non-competition agreements (Note 2) 312 762

Shareholders' equity (Note 6):
Common stock, $.01 par value:
Authorized shares--20,000,000
Issued and outstanding shares: 1997--8,275,157;
1996--8,123,557 83 81
Additional paid-in capital 18,592 18,044
Retained earnings 14,487 8,187
------------------------------
Total shareholders' equity 33,162 26,312
------------------------------
Total liabilities and shareholders' equity $ 100,688 $ 94,895
==============================

See accompanying notes.

21
22

P.A.M. Transportation Services, Inc.

Consolidated Statements of Income

(thousands, except per share data)

YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------------------

Operating revenues (Notes 1, 2 and 8) $ 127,211 $ 113,021 $ 91,595
Operating expenses and costs:
Salaries, wages and benefits 57,662 52,444 40,020
Operating supplies and expenses 24,666 21,909 16,719
Rents and purchased transportation 1,655 1,824 1,538
Depreciation and amortization 12,995 11,999 9,428
Operating taxes and licenses 7,581 6,734 5,608
Insurance and claims 5,571 5,004 4,163
Communications and utilities 1,001 1,090 852
Other 2,394 2,077 1,666
Loss on sale or disposal of property and equipment 71 375 159
----------------------------------------
113,596 103,456 80,153
----------------------------------------
Operating income 13,615 9,565 11,442
Other income (expense):
Interest expense (3,423) (4,137) (3,521)
Other -- 31 166
----------------------------------------
(3,423) (4,106) (3,355)
----------------------------------------
Income before income taxes 10,192 5,459 8,087
Federal and state income taxes:
Current 1,120 259 528
Deferred 2,772 1,888 2,545
----------------------------------------
3,892 2,147 3,073
----------------------------------------
Net income $ 6,300 $ 3,312 $ 5,014
========================================
Earnings per common share (Note 7):
Basic $ .77 $ .66 $ 1.01
=========================================
Diluted $ .76 $ .44 $ .65
========================================
Average common shares outstanding:
Basic 8,192 5,035 4,970
========================================
Diluted 8,290 7,578 7,654
========================================

See accompanying notes.

22
23

P.A.M. Transportation Services, Inc.

Consolidated Statements of Shareholders' Equity
(thousands)

- ----------------------------------------------------------------------------------

ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------

Balances at January 1, 1995 $49 $13,123 $ (139) $13,033
Net income -- -- 5,014 5,014
Exercise of stock options--
shares issued (Note 6) 1 142 -- 143
Tax benefits of stock options
(Note 6) -- 42 -- 42
- ----------------------------------------------------------------------------------
Balances at December 31, 1995 50 13,307 4,875 18,232
Net income -- -- 3,312 3,312
Exercise of stock options--
shares issued (Note 6) 31 4,695 -- 4,726
Tax benefits of stock options
(Note 6) -- 42 -- 42
- ----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 81 18,044 8,187 26,312
NET INCOME -- -- 6,300 6,300
EXERCISE OF STOCK OPTIONS--
SHARES ISSUED (NOTE 6) 2 467 -- 469
TAX BENEFITS OF STOCK OPTIONS
(NOTE 6) -- 81 -- 81

- ----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31,1997 $83 $18,592 $ 14,487 $33,162
- ----------------------------------------------------------------------------------

See accompanying notes.

23
24
P.A.M. Transportation Services, Inc.

Consolidated Statements of Cash Flows

(thousands, except per share data)

YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------

OPERATING ACTIVITIES
Net income $ 6,300 $ 3,312 $ 5,014
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 12,995 11,999 9,428
Non-competition agreement amortization 440 408 261
Provision for doubtful accounts -- 140 89
Provision for deferred income taxes 2,772 1,888 2,545
Loss on sale or disposal of property and equipment 71 375 159
Changes in operating assets and liabilities:
Accounts receivable (1,515) (2,047) (3,013)
Prepaid expenses and other assets (318) 749 (798)
Income taxes refundable (415) -- 187
Trade accounts payable 3,650 (2,934) 1,652
Accrued expenses 1,018 (831) (246)
----------------------------------------
Net cash provided by operating activities 24,998 13,059 15,278

INVESTING ACTIVITIES
Purchases of property and equipment (16,736) (19,921) (25,307)
Proceeds from sale or disposal of property and equipment 195 2,020 3,841
Lease payments received on direct financing lease -- 1,240 624
Choctaw acquisition less cash acquired -- -- (1,323)
AFS acquisition -- (200) --
----------------------------------------
Net cash used in investing activities (16,541) (16,861) (22,165)
----------------------------------------
FINANCING ACTIVITIES
Borrowings under line of credit 151,616 127,766 99,884
Repayments under line of credit (153,624) (128,445) (97,518)
Borrowings of long-term debt 12,784 17,527 21,239
Repayments of long-term debt (18,792) (19,093) (13,083)
Payments under noncompetition agreements (450) (407) (269)
Proceeds from exercise of stock options and warrants 388 4,724 143
Tax benefits of stock options 81 42 42
----------------------------------------
Net cash (used in) provided by financing activities (7,997) 2,114 10,438
----------------------------------------
Net increase in cash and cash equivalents 460 (1,688) 3,551
Cash and cash equivalents at beginning of year 5,941 7,629 4,078
----------------------------------------
Cash and cash equivalents at end of year $ 6,401 $ 5,941 $ 7,629
========================================

See accompanying notes.

24
25

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements
December 31, 1997

1. ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS AND CONSOLIDATION

P.A.M. Transportation Services, Inc. (the "Company"), through its subsidiaries,
operates as a truckload motor carrier.

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.

Majority ownership of the Company is held by an affiliate of another
transportation company, with whom the Company has certain business
relationships. (See Note 8.)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

TIRE PURCHASES

Tires purchased with revenue equipment are capitalized as a cost of the related
equipment. Replacement tires are included in other current assets and are
amortized over a 24-month period. Amounts paid for the recapping of tires are
expensed when incurred.

EXCESS OF COST OVER NET ASSETS ACQUIRED

The excess of cost over net assets acquired, or goodwill, is being amortized on
a straight-line basis over 25 years. The carrying value of goodwill will be
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based on
undiscounted cash flows acquired over the remaining amortization period, the
Company's carrying value of the goodwill would be reduced by the estimated
shortfall of cash flows. No reduction of goodwill was required as of December
31, 1997.

CLAIMS LIABILITIES

With respect to cargo loss, collision and auto liability, the Company maintains
the following insurance coverage and deductibles: P.A.M. Transport, Inc., P.A.M.
Dedicated Services, Inc., and Choctaw Express, Inc. are covered under the same
insurance policy issued by St. Paul Insurance Company. The auto liability and
collision coverages are subject to a $2,500 deductible per occurrence while the
cargo loss coverage has a $1,000 deductible. Allen Freight Services, Inc., is
insured by Great West Insurance Company. The auto liability

25

26

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (continued)

coverage is not subject to a deductible while the collision deductible for
tractors and trailers are $2,500 and $500, respectively, per occurrence. The
cargo loss coverage is subject to a deductible of $5,000 per occurrence. The
Company maintains a reserve for estimated losses for claims incurred and
maintains a reserve for claims incurred but not reported (based on the Company's
historical experience). The Company is self-insured for workers' compensation,
with excess coverage maintained for claims exceeding $250,000 in Arkansas,
Oklahoma, Ohio, Mississippi and Florida. The Company has reserved for estimated
losses to pay such claims as incurred. Additionally, a reserve has been
estimated for those claims incurred but not reported. The Company has not
experienced any adverse trends involving differences in claims experienced
versus claims estimates for workers' compensation reserves. The Company
contracts a third-party licensed associate of risk management and a certified
Hazard Control Manager to develop its workers' compensation reserves using the
Company's historical data of past injuries. Letters of credit in the amounts of
$300,000, $200,000, $250,000, and $500,000 are held by a bank as security for
workers' compensation claims in Arkansas, Oklahoma, Mississippi, and Florida,
respectively, and letters of credit in the amounts of $100,000 and $150,000 are
held by a bank for auto liability claims.

REVENUE RECOGNITION POLICY

The Company recognizes revenue based upon relative transit time in each
reporting period with expenses recognized as incurred.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. For financial reporting purposes,
the cost of such property is depreciated principally by the straight-line
method. For tax reporting purposes, accelerated depreciation or applicable cost
recovery methods are used. Gains and losses are reflected in the year of
disposal. The following is a table reflecting estimated ranges of asset lives by
major class of depreciable assets:

Asset Class Estimated Asset Life
----------- --------------------

Tractors 3-4 years
Trailers 5-7 years
Service Vehicles 3-5 years
Office Furniture 3-7 years
Buildings 5-30 years

26

27

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (continued)

EQUIPMENT HELD FOR SALE

Equipment held for sale consists of revenue equipment no longer in service, that
is expected to be sold within the next year. This equipment is recorded at its
estimated net realizable value.

INCOME TAXES

The Company applies the provision of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS No. 109 requires
recognition of deferred tax liabilities and assets for expected future
consequences of events that have been included in a company's financial
statements or tax return. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statements and the
tax basis of assets and liabilities using enacted tax rates.

BUSINESS SEGMENT AND CONCENTRATIONS OF CREDIT RISK

The Company operates in one business segment, motor carrier operations. The
Company provides transportation services to customers throughout the United
States and portions of Canada. The Company performs ongoing credit evaluations
and generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations. At December 31, 1997, one customer accounted for 25% of the
consolidated trade accounts receivable balance. At December 31, 1996, one
customer accounted for 16% of the consolidated trade accounts receivable
balance.

In 1997, 1996 and 1995, one customer accounted for 25%, 22% and 19% of revenues,
respectively. A second customer accounted for 12% of revenues in 1997, 1996 and
1995. The Company's largest customer is an automobile manufacturer. The Company
also provides transportation services to other manufacturers who are suppliers
for automobile manufacturers including the Company's largest customer. As a
result, concentration of the Company's business within the automobile industry
is greater than the concentration in a single customer. Of the Company's
revenues for 1997, 1996 and 1995, 41%, 37% and 40%, respectively, were derived
from transportation services provided to the automobile manufacturing industry.

COMPENSATION TO EMPLOYEES

Stock based compensation to employees is accounted for based on the instrinsic
value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.

27
28

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (continued)

RECENT ACCOUNTING PRONOUNCEMENTS

In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS no. 121"). This statement was
adopted in the first quarter of 1996. The adoption of SFAS No. 121 did not have
a significant impact on the Company's financial position or results of
operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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.

2. ACQUISITIONS

On March 11, 1996, the Company closed the purchase of all of the outstanding
capital stock (the "Shares") of Allen Freight Services, Inc., a Missouri
corporation ("AFS"). The total purchase price for the shares was $200,000, which
was negotiated by the parties at arms length. Assets of approximately $2.2
million were acquired and liabilities of approximately $3.5 million were
assumed. The Company paid the purchase price by utilizing its existing line of
credit.

The acquisition has been accounted for under the purchase method, effective
March 11, 1996, with the operations of AFS included in the Company's financial
statements since that date. If the acquisition had occurred at the beginning of
fiscal 1996, the effect on consolidated operating revenues, net income and net
income per share would not have been material. The purchase price has been
allocated to assets and liabilities based on their estimated fair values as of
the date of the acquisition. Approximately $1.5 million in goodwill was recorded
as a result of the purchase allocation and is being amortized over a 25-year
period. The Company also entered into three-year non-competition agreements with
four former shareholders and officers/employees of AFS.

On January 31, 1995, the Company acquired substantially all the assets and
liabilities of Choctaw Express, Inc. and Choctaw Brokerage, Inc. based in
Oklahoma, (collectively "Choctaw"). Assets of approximately $2.7 million were
acquired and liabilities of approximately $.8 million were assumed. The total
purchase price for Choctaw was approximately $2.5 million.

28
29

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

2. ACQUISITIONS (continued)

The acquisition has been accounted for using the purchase method, effective
January 31, 1995, with operations included in the Company's financial statements
beginning on the acquisition date. The purchase price has been allocated to
assets and liabilities based on their estimated fair values as of the date of
acquisition. Goodwill in the amount of $600,000 was recorded as a result of the
purchase allocation and is being amortized over a 25-year period. The Company
entered into a five-year non-competition agreement with the former shareholder
of Choctaw which provides for payment of approximately $300,000 per year.

Pro forma unaudited financial information (as if the Choctaw acquisition was
completed at the beginning of the respective periods) for 1995 is provided
below:

YEAR ENDED DECEMBER 31, 1995
----------------------------------
(thousands, except per share data)
(Unaudited)

Operating revenues $ 92,462
Operating expenses 80,917
----------
Operating income 11,545
Other expenses, net 3,373
Income taxes 3,105
----------
Net income $ 5,067
==========
Net income per common share:
Basic $ 1.02
==========
Diluted $ .66
==========
Average common share outstanding:
Basic 4,970
==========
Diluted 7,654
==========

The above pro forma unaudited financial information does not purport to be
indicative of the results which actually would have occurred had the acquisition
been made at the beginning of the respective period.

29
30

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

3. ACCRUED EXPENSES

DECEMBER 31
1997 1996
---------------------------
(thousands)

Payroll $ 1,818 $ 1,591
Taxes 702 217
Interest 175 280
Driver escrows 307 340
Insurance 328 263
Current portion of non-compete agreements 448 371
Self-insurance claims reserves 1,057 755
===========================
$ 4,835 $ 3,817
===========================

4. LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 31
1997 1996
----------------------------
(thousands)

Equipment financings (1) $ 35,733 $40,757
Line of credit with a bank, with interest at the LIBOR rate
plus 1.75% or 2.15% due May 31, 1999 and
collateralized by accounts receivable (2) 5,222 7,229
Note payable (3) 364 418
Capitalized lease obligations (4) 2,451 3,383
----------------------------
43,770 51,787
Less current maturities 15,544 16,849
----------------------------
$ 28,226 $34,938
============================

(1) Equipment financings consist of installment obligations for revenue and
service equipment purchases, payable in various monthly installments
through 2001, at a weighted average interest rate of 7.69% and
collateralized by equipment with a net book value of approximately $56.7
million at December 31, 1997.

(2) The line of credit agreement with a bank provides for maximum borrowings
of $15.0 million and contains restrictive covenants which requires the
Company to maintain, on a consolidated basis, a net worth of $12.5 million
and a debt service coverage ratio of not less than 1.0 to 1.0. The
interest rate varies based on the use of the funds. Equipment financed
using the line of credit is at an interest rate of LIBOR plus 1.75% (7.47%
at December 31, 1997). Withdrawals for general working capital is at an
interest rate of LIBOR plus 2.15% (7.87% at December 31, 1997). The line
of credit agreement also includes restrictions on dividend payments and
certain corporate acts such as mergers and consolidations.

30
31

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

4. LONG-TERM DEBT (continued)

(3) 8% real estate note to the former majority shareholder, payable in
monthly installments through March 2003.

(4) Capitalized lease obligations to a financial service organization for
revenue equipment are payable in various monthly installments through
December 1999 at rates of 8.15% and 8.49%, collateralized by equipment
with a net book value of approximately $3 million, as of December 31, 1997
(Note 9).

Scheduled annual maturities on long-term debt outstanding, excluding capital
lease obligations (see Note 9), at December 31, 1997 are:

(thousands)

1998 $ 14,362
1999 15,734
2000 8,660
2001 2,456
2002 79
Thereafter 28
---------
$ 41,319
=========

Interest payments of approximately $3.5 million, $4.0 million, and $3.5 million
were made during 1997, 1996 and 1995 respectively.

5. INCOME TAXES

Under SFAS No. 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

31
32

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

5. INCOME TAXES (continued)

Significant components of the Company's deferred tax liabilities and assets are
as follows:

DECEMBER 31
1997 1996
---------------------------
Deferred tax liabilities: (thousands)

Property and equipment $ 14,677 $ 12,615
Prepaid expenses 982 896
---------------------------
Total deferred tax liabilities 15,659 13,511

Deferred tax assets:
Net operating loss carryovers 869 2,981
Alternative minimum tax credit 3,037 1,851
Investment credit carryovers 1,096 1,096
Allowance for doubtful accounts 220 220
Vacation reserves 220 220
Self-insurance reserves 454 235
Non-competition agreement 300 182
Revenue recognition 148 92
---------------------------
Total deferred tax assets 6,344 6,877
===========================
Net deferred tax liabilities 9,315 $ 6,634
===========================

The reconciliation between the effective income tax rate and the statutory
Federal income tax rate is presented in the following table:

YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------------------
(thousands)

Income tax at the statutory Federal rate of 34% $3,465 $ 1,856 $ 2,750
Nondeductible expenses 63 108 39
State income taxes (85) (118) (167)
Other (412) (46) (41)
---------------------------------------
Federal income taxes 3,031 1,800 2,581
State income taxes 861 347 492
---------------------------------------
Total income taxes $3,892 $ 2,147 $ 3,073
=======================================
Effective tax rate 38.2% 39.3% 38.0%
=======================================

32
33

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

5. INCOME TAXES (continued)

The current income tax provision consists of the following:

1997 1996 1995
--------------------------------------
(thousands)

Federal $ 870 $179 $406
State 250 80 122
======================================
$ 1,120 $259 $528
======================================

As of December 31, 1997, the Company has Federal net operating loss and
investment tax credit carryovers of approximately $2.3 million and $1.1 million,
respectively. The net operating loss carryovers begin to expire in 2003 and the
investment credit carryovers begin to expire in 1999. The current taxes provided
in 1997, 1996 and 1995 result from alternative minimum taxable income. The
Company has alternative minimum tax credits of approximately $3.0 million at
December 31, 1997 which carryover indefinitely.

Income taxes paid totaled approximately $1,300,000, $400,000 and $400,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

6. SHAREHOLDERS' EQUITY

The Company maintains an incentive stock option plan, a nonqualified stock
option plan, and an employee stock option plan for the issuance of options to
directors, officers, key employees and others. The option price under these
plans is the fair market value of the stock at the date the options were
granted, ranging from $2.375 to $7.375 as of December 31, 1997.

Outstanding incentive stock options and employee stock options at December 31,
1997 must be exercised within six years from the date of grant and vest in
increments of 20% each year. Outstanding nonqualified stock options at December
31, 1997 must be exercised within five to six years and certain nonqualified
options may not be exercised within one year of the date of grant.

33
34

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

6. SHAREHOLDERS' EQUITY (continued)

Transactions in stock options under these plans are summarized as follows:

SHARES
UNDER
OPTION PRICE RANGE
--------------------------

Outstanding at January 1, 1995 352,200 $ 2.38-$6.00
Granted 260,000 $ 5.75-$6.75
Exercised (56,700) $ 2.38-$6.00
Canceled (23,400) $ 2.38-$6.75
--------------------------
Outstanding at December 31, 1995 532,100 $ 2.38-$6.75
Granted 10,000 $6.50-$7.375
Exercised (36,600) $ 2.38-$6.00
Canceled (13,900) $ 2.38-$6.75
--------------------------
Outstanding at December 31, 1996 491,600 $2.38-$7.375
Granted 3,000 $6.50-$7.375
Exercised (146,350) $ 2.38-$6.00
Canceled (400) $ 2.38-$6.75
--------------------------
Outstanding at December 31, 1997 347,850 $2.38-$7.375
==========================

Options exercisable at December 31, 1997 344,850
========

The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plans been
determined consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:

1997 1996
---------------------

Net income: (thousands)
As reported $6,300 $3,312
Pro forma $6,178 $3,172

Earnings per share as reported:
Basic $ .77 $ .66
Diluted $ .76 $ .44
Pro forma earnings per share:
Basic $ .75 $ .63
Diluted $ .75 $ .42

34
35

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

6. SHAREHOLDERS' EQUITY (continued)

Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0%; expected volatility of 65.15% to 76.64%;
risk-free interest rate of 5.73% to 7.02%; and expected lives of five years.

The majority shareholder exercised stock warrants to purchase an aggregate of
3,092,000 shares of the Company's common stock at $1.50 per warrant on December
30, 1996.

7. EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("SFAS No. 128"), establishing new standards for
computing and presenting earnings per share. The provisions of SFAS No. 128 are
effective for financial statements issued for periods ending after December 15,
1997. The Company has adopted SFAS No. 128 effective December 31, 1997, and all
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements. Basic
earnings per common share were computed by dividing the income by the weighted
average number of shares outstanding during the period. Diluted earnings per
share were computed assuming the exercise of stock warrants and options to
purchase a total of .3 million, 3.3 million, and 3.5 million shares of common
stock, for 1997, 1996, and 1995, respectively, as determined by applying the
treasury stock method. Under the treasury stock method of computing earnings per
share, the number of shares of treasury stock assumed repurchased is limited to
20% of common stock outstanding, with the remaining shares assumed to be newly
issued, and the excess proceeds assumed to have reduced long-term borrowings
outstanding for the year.

8. RELATED PARTY TRANSACTIONS

The Company provides motor carrier services to an affiliate of its majority
shareholder. Revenues from these transactions totaled approximately $14.5
million, $.4 million and $5.3 million for 1997, 1996, and 1995, respectively.

During 1993, the Company began leasing certain revenue equipment with an
original cost of $2.7 million to an affiliate of the majority shareholder under
a direct financing lease arrangement. The Company earned interest income of
$31,000 and $200,000 1996 and 1995, respectively, relating to this lease which
is included in other income in the accompanying financial statements. The
Company received full payment of the remaining balance on the lease agreement
during 1996 in the amount of $1.1 million.

35
36

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

8. RELATED PARTY TRANSACTIONS (continued)

Payments made by the Company to an affiliate of the majority shareholder for the
reimbursement of operating and other expenses paid on behalf of the Company and
debt repayments made on notes payable to the affiliate aggregated approximately
$.9 million, $6.4 million and $6.8 million in 1997, 1996, and 1995,
respectively.

Trade accounts payable at December 31, 1997 includes a payable to an affiliate
of the majority shareholder of $1,089,000.

9. LEASES AND COMMITMENTS

The Company leases certain revenue equipment under capital leases.

The future minimum payments under these leases (see Note 4) at December 31, 1997
consisted of the following:

(thousands)

1998 $ 1,342
1999 1,330
--------
Total minimum lease payments 2,672
Amounts representing interest 221
--------
Present value of net minimum lease payments $ 2,451
========

Assets held under capitalized leases are included in property, plant and
equipment as of December 31, 1997 as follows:

(thousands)

Revenue equipment $ 5,256
Accumulated amortization (2,252)
--------
$ 3,004
========

No capital lease obligations were entered into in 1997 or 1996. Capital lease
obligations incurred in 1995 totaled $1.5 million. Lease amortization is
included in depreciation expense.

10. PROFIT SHARING PLAN

P.A.M. Transport, Inc. a subsidiary of the Company, sponsors a profit sharing
plan for the benefit of all eligible employees. The plan qualifies under Section
401(k) of the Internal Revenue Code thereby allowing eligible employees to make
tax deductible contributions to the plan. The plan provides for annual employer
matching contributions of 25% of each participant's voluntary contribution up to
$400.

36
37

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

10. PROFIT SHARING PLAN (continued)

Choctaw Express, Inc., a subsidiary of the Company sponsored a profit sharing
plan for the benefit of all eligible employees. The plan qualifies under Section
401(k) of the Internal Revenue Code thereby allowing all eligible employees to
make tax deductible contributions to the plan. The plan provides for employer
matching contributions of 50% of each participant's voluntary contribution up to
3% of the participant's compensation.

The Choctaw Express, Inc. profit sharing plan was merged into the P.A.M.
Transport, Inc. profit sharing plan effective December 31, 1995.

Allen Freight Services, Inc., a subsidiary of the Company sponsored a profit
sharing plan for the benefit of all eligible employees. The plan qualifies under
Section 401(k) of the Internal Revenue Code thereby allowing all eligible
employees to make tax deductible contributions to the plan. The plan provides
for employer matching contributions of 50% of each participant's voluntary
contribution up to 3% of the participant's compensation.

Total contributions to the above plans totaled approximately $92,000, $100,000
and $60,000 in 1997, 1996 and 1995, respectively.

11. LITIGATION

The Company is not a party to any pending legal proceedings which management
believes to be material to the financial condition of the Company. The Company
maintains liability insurance against risks arising out of the normal course of
its business.

37
38

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

12. QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The tables below presents quarterly financial information for 1997 and 1996:

1997
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------
(thousands, except per share data)

Operating revenues $32,630 $ 31,353 $ 30,776 $ 32,452
Operating expenses 29,620 27,089 27,581 29,306
-------------------------------------------------
Operating income 3,010 4,264 3,195 3,146
Other expenses - net 869 888 801 864
Income taxes 856 1,283 910 844
-------------------------------------------------
Net income $ 1,285 $ 2,093 $ 1,484 $ 1,438
=================================================
Net income per common share:
Basic $ .16 $ .26 .18 $ .17
=================================================
Diluted $ .16 $ .25 $ .18 $ .17
=================================================
Average common shares outstanding:
Basic 8,126 8,147 8,223 8,269
=================================================
Diluted 8,250 8,281 8,363 8,439
=================================================

1996
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
(thousands, except per share data)

Operating revenues $ 23,532 $ 30,169 $ 29,618 $ 29,701
Operating expenses 21,390 27,089 26,892 28,086
------------------------------------------------
Operating income 2,142 3,080 2,726 1,615
Other expenses - net 917 1,083 1,088 1,017
Income taxes 465 799 655 227
------------------------------------------------
Net income $ 760 $ 1,198 $ 983 $ 371
================================================
Net income per common share:
Basic $ .15 $ .24 $ .20 $ .07
================================================
Diluted $ .10 $ .16 $ .13 $ .05
================================================
Average common shares outstanding:
Basic 5,016 5,018 5,023 5,098
================================================
Diluted 7,724 7,643 7,610 7,350
================================================

38
39

P.A.M. Transportation Services, Inc.
Notes to Consolidated Financial Statements (continued)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:

Cash and cash equivalents - The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.

Long-term debt - The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.

Line of credit - The carrying amount for the line of credit approximates fair
value.

The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows (in thousands):

1997 1996
- -------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------

Cash and cash equivalent $ 6,401 $ 6,401 $ 5,941 $ 5,941
Long-term debt 38,548 38,759 44,558 45,512
Line of credit 5,222 5,222 7,229 7,229
=================================================================================================

39
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On November 19, 1996, the Company dismissed its independent auditors,
Ernst & Young LLP, and on the same date engaged the firm of Arthur Andersen LLP
as its independent auditors for the fiscal year ending December 31, 1996. Each
of these actions was approved by the Board of Directors of the Company.

The reports of Ernst & Young LLP on the financial statements of the
Company for the fiscal year ended December 31, 1995 did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.

In connection with the audit of the Company's financial statements for
the year ended December 31, 1995, and in the subsequent interim period prior to
the dismissal of Ernst & Young LLP, there were no disagreements with Ernst &
Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused it to make
reference to the subject matter of the disagreement in its report.

Ernst & Young LLP has furnished the Company with a letter addressed to
the Securities and Exchange Commission stating that it agrees with the above
statements, a copy of which has been filed as an exhibit to the Current Report
on Form 8-K dated November 19, 1996.

40

41

PART III

Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement (the "Proxy Statement") to be filed pursuant to Regulation 14A for the
Company's Annual Meeting of Shareholders to be held on May 22, 1998. The Company
will, within 120 days of the end of its fiscal year, file with the Securities
and Exchange Commission a definitive proxy statement pursuant to Regulation 14A.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information responsive to this item is incorporated by reference from
the section entitled "Election of Directors" contained in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information responsive to this item is incorporated by reference from
the section entitled "Executive Compensation" contained in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information responsive to this item is incorporated by reference from
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information responsive to this item is incorporated by reference from
the section entitled "Certain Relationships and Related Transactions" contained
in the Proxy Statement.

41

42

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements and Auditors' Report.

The following financial statements and auditors' report have been filed
with Item 8 in Part II of this report:

Reports of Independent Public Accountants

Consolidated Balance Sheets - December 31, 1997 and 1996

Consolidated Statements of Income - Years ended December 31, 1997,
1996 and 1995

Consolidated Statements of Shareholders' Equity - Years ended December
31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995

Notes to Consolidated Financial Statements

(a) 2. Financial Statement Schedules.

The following supporting financial statement schedule is filed with this
report:

II - Valuation and Qualifying Accounts - Years Ended December 31,
1997, 1996 and 1995

All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.

42

43

(a) 3. Exhibits.

The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) the Form S-1 Registration Statement under the Securities Act of 1933,
as filed with the Securities and Exchange Commission on July 30, 1986,
Registration No. 33-7618, as amended on August 8, 1986, September 3, 1986 and
September 10, 1986 ("1986 S-1"); (ii) the Annual Report on Form 10-K for the
year ended December 31, 1987 ("1987 10-K"); (iii) the Annual Report on Form 10-K
for the year ended December 31, 1992 ("1992 10-K"); (iv) the Annual Report on
Form 10-K for the year ended December 31, 1993 ("1993 10-K"); (v) the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994 ("6/30/94 10-Q"); (vi)
the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 ("6/30/95
10-Q"); (vii) the Annual Report on Form 10-K for the year ended December 31,
1995 ("1995 10-K"); (viii) the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (9/30/96 10-Q); or the Annual Report on Form 10-K for
the year ended December 31, 1996 ("1996 10-K").

Exhibit # Description of Exhibit
- --------- ----------------------

*3.1 - Amended and Restated Certificate of Incorporation of the Registrant (Exh.
3.1, 1986 S-1)

*3.1.1 - Amendment to Certificate of Incorporation dated June 24, 1987 (Exh.
3.1.1, 1987 10-K)

*3.2 - Amended and Restated By-Laws of the Registrant (Exh. 3.2, 1986 S-1)

*3.2.1 - Amendment to Article I, Section 3 of Bylaws of Registrant (Exh. 3.2.1,
1986 S-1)

*3.2.2 - Amendments to Bylaws of Registrant adopted May 7, 1987 (Exh. 3.2.2,
1987 10-K)

*3.2.3 - Amendments to Bylaws of Registrant adopted January 4, 1993 (Exh. 3.2.3,
1992 10-K)

*4.1 - Specimen Stock Certificate (Exh. 4.1, 1986 S-1)

*4.2 - Loan Agreement dated July 26, 1994 among First Tennessee Bank National
Association, Registrant and P.A.M. Transport, Inc. together with Promissory
Note (Exh. 4.1, 6/30/94 10-Q)

*4.2.1 - Security Agreement dated July 26, 1994 between First Tennessee Bank
National Association and P.A.M. Transport, Inc. (Exh. 4.2, 6/30/94 10-Q)

*4.3 - First Amendment to Loan Agreement date June 27, 1995 by and among P.A.M.
Transport, Inc., First Tennessee Bank National Association and P.A.M.
Transportation Services, Inc., together with Promissory Note in the
principal amount of $2,500,000 (Exh. 4.1.1, 6/30/95 10-Q)

*4.3.1 - First Amendment to Security Agreement dated June 28, 1995 by and
between P.A.M. Transport, Inc. and First Tennessee Bank National
Association (Exh. 4.2.2, 6/30/95 10-Q)

*4.3.2 - Security Agreement dated June 27, 1995 by and between Choctaw Express,
Inc. and First Tennessee Bank National Association (Exh. 4.1.3, 6/30/95
10-Q)

*4.3.3 - Guaranty Agreement of P.A.M. Transportation Services, Inc. dated June
27, 1995 in favor of First Tennessee Bank National Association respecting
$10,000,000 line of credit (Exh. 4.1.4, 6/30/95 10-Q)

*4.4 - Second Amendment to Loan Agreement dated July 3, 1996 by and among P.A.M.
Transport, Inc.,

43

44

First Tennessee Bank National Association and P.A.M. Transportation
Services, Inc., together with Promissory Note in the principal amount
of $5,000,000 (Exh. 4.1.1, 9/30/96 10-Q)

* 4.4.1 - Second Amendment to Security Agreement dated July 3, 1996 by and
between P.A.M. Transport, Inc. and First Tennessee National Bank
Association (Exh. 4.1.2, 9/30/96 10-Q)

* 4.4.2 - First Amendment to Security Agreement dated July 3, 1996 by and
between Choctaw Express, Inc. and First Tennessee Bank National
Association (Exh. 4.1.3, 9/30/96 10-Q)

* 4.4.3 - Security Agreement dated July 3, 1996 by and between Allen Freight
Services, Inc. and First Tennessee Bank National Association (Exh.
4.1.4, 9/30/96 10-Q)

- No other long-term debt instrument of the Registrant or its
subsidiaries authorizes indebtedness exceeding 10% of the total
assets of the Registrant and its subsidiaries on a consolidated
basis and the Registrant hereby undertakes to provide the
Commission upon request with any long-term debt instrument not
filed herewith.

*10.1 - Incentive Stock Option Plan, dated July 25, 1986 (Exh. 10.2, 1986
S-1)

*10.1.1 - Amendment to 1986 Incentive Stock Option Plan, dated June 2, 1987
(Exh. 10.2.1, 1987 10-K)

*10.2 - Non-Qualified Stock Option Plan, dated July 25, 1986 (Exh. 10.3, 1986
S-1)

*10.2.1 - Amendment No. 1 to Non-Qualified Stock Option Plan (Exh. 10.2.1,
1993 10-K)

*10.3 - Employment Agreement between the Registrant and Robert W. Weaver
dated January 1, 1995 (Exh. 10.3, 1995 10-K)

*10.4 - Non-Competition Agreement dated January 31, 1995 between Registrant
and Joe M. Bussell (Exh. 10.1, 1/31/95 8-K)

10.5 - Incentive Compensation Plan of Registrant adopted October 17, 1997
for fiscal years 1998 and 1999

*10.6 - 1995 Stock Option Plan, effective June 29, 1995 (Exh. 10.6, 1996
10-K)

21.1 - Subsidiaries of the Registrant

23.1 - Consent of Arthur Andersen LLP

23.2 - Consent of Ernst & Young LLP

27.1 - Financial Data Schedule for the year ended December 31, 1997 (for
SEC use only)

27.2 - Restated Financial Data Schedule for the year ended December 31,
1996 which is hereby restated pursuant to SFAS No. 128, "Earnings
Per Share" (for SEC use only)

27.3 - Restated Financial Data Schedule for the year ended December 31,
1995 which is hereby restated pursuant to SFAS No. 128, "Earnings
Per Share" (for SEC use only)

44

45

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the fourth quarter ended
December 31, 1997.

45

46

SCHEDULE II

P.A.M. TRANSPORTATION SERVICES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 1997, 1996 and 1995

ADDITIONS
---------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts Deductions at End
Description of Period Expenses (Describe) (Describe) of Period
----------- ---------- ---------- ------------ ----------- ----------

1997 - Allowance for doubtful accounts $579,333 -- -- -- $579,333

1996 - Allowance for doubtful accounts 323,887 140,446 115,000(A) -- 579,333

1995 - Allowance for doubtful accounts 239,343 88,692 -- 4,148(B) 323,887

Note A - Allen Freight Services, Inc. Allowance for Bad Debts.

Note B - Accounts written off.

46

47

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

P.A.M. TRANSPORTATION SERVICES, INC.

Dated: March 26, 1998 By: /s/ Robert W. Weaver
--------------------------------------------
ROBERT W. WEAVER
President and Chief Executive Officer
(principal executive officer)

Dated: March 26, 1998 By: /s/ Larry J. Goddard
--------------------------------------------
LARRY J. GODDARD, Vice President - Finance,
Chief Financial Officer, Secretary and
Treasurer
(principal financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:

P.A.M. TRANSPORTATION SERVICES, INC.

Dated: March 26, 1998 By: /s/ Robert W. Weaver
--------------------------------------------
ROBERT W. WEAVER, President and
Chief Executive Officer, Director

Dated: March 23, 1998 By: /s/ Matthew T. Moroun
--------------------------------------------
MATTHEW T. MOROUN, Director

Dated: March 26, 1998 By: /s/ Daniel C. Sullivan
--------------------------------------------
DANIEL C. SULLIVAN, Director

Dated: March 23, 1998 By: /s/ Charles F. Wilkins
--------------------------------------------
CHARLES F. WILKINS, Director

48

EXHIBIT INDEX

Exhibit No. Description
- ----------- ---------------------------------------------------------------

10.5 Incentive Compensation Plan of Registrant adopted October 17,
1997 for fiscal years 1998 and 1999

21.1 Subsidiaries of the Registrant

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Ernst & Young LLP

27.1 Financial Data Schedule for the year ended December 31, 1997
(for SEC use only)

27.2 Restated Financial Data Schedule for the year ended December
31, 1996 which is hereby restated pursuant to SFAS No. 128,
"Earnings Per Share" (for SEC use only)

27.3 Restated Financial Data Schedule for the year ended December
31, 1995 which is hereby restated pursuant to SFAS No. 128,
"Earnings Per Share" (for SEC use only)

48