Back to GetFilings.com



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One) 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, 2003
or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 0-24946

KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)

Arizona 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5601 West Buckeye Road, Phoenix, Arizona 85043
(Address of principal executive offices) (Zip Code)

(602) 269-2000
(Registrant's 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, $0.01 par value Nasdaq - National Market System

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 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. [ ]

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

The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2003, was $927,600,044 (based upon $24.82 per share
being the closing sale price on that date as reported by the National
Association of Securities Dealers Automated Quotation System - National Market
System. In making this calculation, the registrant has assumed, without
admitting for any purpose, that all executive officers and directors of the
company, and no other persons, are affiliates.

The number of shares outstanding of the registrant's common stock as of
February 23, 2004 was 37,512,966.

Materials from the registrant's Notice and Proxy Statement relating to the
2004 Annual Meeting of Shareholders to be held on May 21, 2004 have been
incorporated by reference into Part III of this Form 10-K.

2



PART I

Item 1. Business

Except for certain historical information contained herein, this Annual
Report contains forward-looking statements that involve risks, assumptions and
uncertainties which are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of
earnings, revenues, or other financial items, any statement of plans,
strategies, and objectives of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Words such as
"believe," "may," "could," "expects," "hopes," "anticipates," and "likely," and
variations of these words, or similar expressions, are intended to identify such
forward-looking statements. Actual events or results could differ materially
from those discussed in forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled "Factors That May Affect Future Results," set forth
below. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statement contained in this Annual Report.

Our headquarters are located at 5601 West Buckeye Road, Phoenix, Arizona
85043 and our website address is www.knighttrans.com. This Annual Report on Form
10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and
all other reports filed with the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 can be obtained free of charge by visiting our
website.

References in this Annual Report to "we," "us," "our" or the "Company" or
similar terms refer to Knight Transportation, Inc. and its consolidated
subsidiaries.

General

We are a dry van truckload carrier based in Phoenix, Arizona. We transport
general commodities for shippers throughout the United States, generally
focusing our operations on short-to-medium lengths of haul. We provide regional
truckload carrier services throughout the U.S. from our 12 facilities located in
Phoenix, Arizona; Salt Lake City, Utah; Portland, Oregon; Denver, Colorado;
Kansas City, Kansas; Katy, Texas; Indianapolis, Indiana; Charlotte, North
Carolina; Gulfport, Mississippi; Memphis, Tennessee; Atlanta, Georgia; and Las
Vegas, Nevada. We opened our Atlanta and Denver facilities during 2003, and our
Las Vegas facility in February 2004. Our stock has been publicly traded since
October 1994. Over the past five years we have achieved substantial growth from
$125.0 million in revenue, before fuel surcharge, and $13.3 million in net
income in 1998 to $326.9 million in revenue, before fuel surcharge, and $35.5
million in net income in 2003. The main factors that affect our results are the
number of tractors we operate, our revenue per tractor (which includes primarily
our revenue per total mile and our number of miles per tractor), and our ability
to control our costs.

Operations

Our operating strategy is to achieve a high level of asset utilization
within a highly disciplined operating system while maintaining strict controls
over our cost structure. To achieve these goals, we operate primarily in
high-density, predictable traffic lanes in select geographic regions, and
attempt to develop and expand our customer base around each of our terminal
facilities. This operating strategy allows us to take advantage of the large
amount of freight traffic transported in regional markets, realize the operating
efficiencies associated with regional hauls, and offer more flexible service to
our customers than rail, intermodal, and smaller regional competitors. In
addition, shorter hauls provide an attractive

3

alternative to drivers in the truckload sector by reducing the amount of time
spent away from home. We believe this improves driver retention, decreases
recruitment and training costs, and reduces insurance claims and other costs. We
operate a modern fleet to accelerate revenue growth and enhance our operating
efficiencies. We employ technology in a cost-effective manner where it assists
us in controlling operating costs and enhancing revenue. Our goal is to increase
our market presence significantly, both in existing operating regions and in
other areas where we believe the freight environment meets our operating
strategy, while seeking to achieve industry-leading operating margins and
returns on investment.

Our operating strategy includes the following important elements:

Regional Operations. We presently operate 15 operating divisions from our
12 facilities which are located in Phoenix, Arizona; Salt Lake City, Utah;
Portland, Oregon; Denver, Colorado; Kansas City, Kansas; Katy, Texas;
Indianapolis, Indiana; Charlotte, North Carolina; Gulfport, Mississippi;
Memphis, Tennessee; Atlanta, Georgia; and Las Vegas, Nevada. We concentrate our
freight operations in an approximately 750-mile radius around each of our
terminals, with an average length of haul in 2003 of approximately 532 miles. We
believe that regional operations offer several advantages, including:

o obtaining greater freight volumes, because approximately 80% of all
truckload freight moves in short-to-medium lengths of haul;

o achieving higher revenue per mile by focusing on high-density traffic
lanes to minimize non-revenue miles and offer our customers a high
level of service and consistent capacity; and

o enhancing safety and driver recruitment and retention by allowing our
drivers to travel familiar routes and return home more frequently.

Operating Efficiencies. Our company was founded on a philosophy of
maintaining operating efficiencies and controlling costs. We maintain a
simplified operation that focuses on operating dry-vans in particular
geographical and shipping markets. This approach allows us to concentrate our
marketing efforts to achieve higher penetration of our targeted service areas
and to achieve higher equipment utilization in dense traffic lanes. We maintain
a modern tractor and trailer fleet in order to obtain fuel and other operating
efficiencies and attract and retain drivers. A generally compatible fleet of
tractors and trailers simplifies our maintenance procedures, reduces parts
supplies, and facilitates our ability to serve a broad range of customer needs,
thereby maximizing equipment utilization and available freight capacity. We also
regulate vehicle speed in order to maximize fuel efficiency, reduce wear and
tear, and minimize claims expenses.

Customer Service. We offer a high level of service to customers in lanes
and regions that complement our other operations, and we seek to establish
ourselves as a preferred or "core carrier" for many of our customers. By
concentrating revenue equipment close to customers in high-density lanes and
regions, we can provide shippers with a consistent supply of capacity and are
better able to match our equipment to customer needs. Our services include
multiple pick-ups and deliveries, dedicated equipment and personnel, on-time
pickups and deliveries within narrow time frames, specialized driver training,
and other services tailored to meet our customers' needs. We price our services
commensurately with the level of service our customers require. By providing
customers a high level of service, we believe we avoid competing solely on the
basis of price.

Using Technology that Enhances Our Business. We purchase and deploy
technology when we believe that it will allow us to operate more efficiently and
the investment is cost-justified. We use a satellite-based tracking and
communication system to communicate with our drivers, to obtain load position
updates, and to provide our customers with freight visibility. The majority of
our trailers are

4

equipped with Terion trailer-tacking technology that allows us to manage our
trailers more effectively, reduce the number of trailers per tractor in our
fleet, enhance revenue through detention fees, and minimize cargo loss. We have
installed Qualcomm's satellite based tracking technology in substantially all of
our tractors, which allows us to rapidly respond to customer needs and allows
our drivers efficient communications with our regional terminals. We have
automated many of our back-office functions, and we continue to invest in
technology where it allows us to better serve our customers and reduce our
costs.

Growth Strategy

We believe that industry trends, our strong operating results and financial
position, and the proven operating model replicated in our regional terminals
create significant opportunities for us to grow. We intend to take advantage of
these growth opportunities by focusing on three key areas:

Opening new regions and expanding existing regional divisions. We currently
have 15 operating divisions , having established presences in Atlanta, Georgia
and Denver, Colorado during 2003 and in Las Vegas, Nevada in February 2004. We
believe there are significant opportunities to further increase our business in
the short-to-medium haul market by opening new regional divisions, while
expanding our existing regional divisions. To take advantage of these
opportunities, we are developing relationships with existing and new customers
in regions that we believe will permit us to develop transportation lanes that
allow us to achieve high equipment utilization and resulting operating
efficiency.

Strengthening our customer and core carrier relationships. We market our
services to both existing and new customers in traffic lanes that complement our
existing operations and will support high equipment utilization. We seek
customers who will diversify our freight base; and our marketing targets include
financially-stable high volume shippers for whom we are not currently providing
services. We also offer a high level of service to customers who use us as a
core carrier.

Opportunities to make selected acquisitions. We are continuously evaluating
acquisition opportunities. Since 1998, we have acquired two short-to-medium haul
truckload carriers: Gulfport, Mississippi-based John Fayard Fast Freight, Inc.
and Corsicana, Texas-based Action Delivery Service, Inc. We believe economic
trends will lead to further consolidation in our industry, and we will consider
additional acquisitions that meet our financial and operating criteria.

Marketing and Customers

Our sales and marketing functions are led by members of our senior
management team, who are assisted by other sales professionals. Our marketing
team emphasizes our high level of service and ability to accommodate a variety
of customer needs. Our marketing efforts are designed to take advantage of the
trend among shippers to outsource transportation requirements, use core
carriers, and seek arrangements for dedicated equipment and drivers.

We have a diversified customer base. For the year ended December 31, 2003,
our top 25 customers represented 49% of revenue; our top 10 customers
represented 29% of revenue; and our top 5 customers represented 18% of revenue.
We believe that a substantial majority of our top 25 customers regard us as a
preferred or core carrier. Most of our truckload carriage contracts are
cancelable on 30 days notice.

We seek to provide consistent, timely, flexible and cost efficient service
to shippers. Our objective is to develop and service specified traffic lanes for
customers who ship on a consistent basis, thereby providing a sustained,
predictable traffic flow and ensuring high equipment utilization. The
short-to-medium haul segment of the truckload carrier market demands timely
pickup and delivery and, in some cases, response on short notice. We seek to
obtain a competitive advantage by providing high quality and consistent capacity
to customers at competitive prices. To be responsive to customers' and

5

drivers' needs, we often assign particular drivers and equipment to prescribed
routes, providing better service to customers, while obtaining higher equipment
utilization.

Our dedicated fleet services may also provide a significant part of a
customer's transportation requirements. Under a dedicated carriage service
agreement, we provide drivers, equipment and maintenance, and, in some
instances, transportation management services that supplement the customer's
in-house transportation department. We furnish these services through
Company-provided revenue equipment and employees, and independent contractors.

Each of our regional divisions is linked to our Phoenix headquarters by an
IBM AS/400 computer system. The capabilities of this system enhance our
operating efficiency by providing cost effective access to detailed information
concerning equipment and shipment status and specific customer requirements, and
also permit us to respond promptly and accurately to customer requests. The
system also assists us in matching available equipment with loads. We also
provide electronic data interchange ("EDI") and internet ("E") services to
shippers requiring such service.

Drivers, Other Employees, and Independent Contractors

As of December 31, 2003, we employed 3,005 persons. None of our employees
is subject to a union contract.

The recruitment, training and retention of qualified drivers are essential
to support our continued growth and to meet the service requirements of our
customers. Drivers are selected in accordance with specific, objective
guidelines relating primarily to safety history, driving experience, road test
evaluations, and other personal evaluations, including physical examinations and
mandatory drug and alcohol testing.

We seek to maintain a qualified driver force by providing attractive and
comfortable equipment, direct communication with senior management, competitive
wages and benefits, and other incentives designed to encourage driver retention
and long-term employment. Many drivers are assigned to dedicated or
semi-dedicated fleet operations, enhancing job predictability. Drivers are
recognized for providing superior service and developing good safety records.

Our drivers are compensated on the basis of miles driven and length of
haul. Drivers also are compensated for additional flexible services provided to
our customers. During the fourth quarter of 2003 we increased our driver
compensation rates one cent per mile, and increased rates by an additional one
cent per mile in January 2004 in connection with the effectiveness of revised
hours-of-service regulations. Drivers are invited to participate in our 401(k)
program and in Company-sponsored health, life and dental plans. Our drivers and
other employees who meet eligibility criteria also participate in our stock
option plan. As of December 31, 2003, a total of 653 of our current employees
had participated in and received option grants under our current and former
stock option plans.

We also maintain an independent contractor program. Because independent
contractors provide their own tractors, the independent contractor program
provides us an alternate method of obtaining additional revenue equipment. We
intend to continue our use of independent contractors. As of December 31, 2003,
we had agreements covering 253 tractors owned and operated by independent
contractors. Each independent contractor enters into a contract with us pursuant
to which the independent contractor is required to furnish a tractor and a
driver exclusively to transport, load and unload goods we haul. Competition for
independent contractors among transportation companies is strong. Independent
contractors are paid a fixed level of compensation based on the total of
trip-loaded and empty miles and are obligated to maintain their own tractors and
pay for their own fuel. We provide trailers for each independent contractor. We
also provide maintenance services for our independent contractors who desire
such services for a charge. We provide financing at market interest rates to our
independent contractors to assist them in acquiring revenue equipment. Our loans
to independent contractors are

6

secured by a lien on the independent contractor's revenue equipment. As of
December 31, 2003, we had outstanding loans of approximately $877,000 to
independent contractors.

Revenue Equipment

As of December 31, 2003, we operated 2,165 Company tractors with an average
age of 2.1 years. We also had under contract 253 tractors owned and operated by
independent contractors. Our trailer fleet consisted of 6,212, 53-foot long,
high cube trailers, including 50 refrigerated trailers, with an average age of
4.1 years.

The efficiency and flexibility provided by our fleet configurations permit
us to handle both high volume and high weight shipments. Our fleet configuration
also allows us to move freight on a "drop-and-hook" basis, increasing asset
utilization and providing better service to customers. We maintain a high
trailer to tractor ratio, targeting a ratio of approximately 2.5 to 1.
Management believes maintaining this ratio promotes efficiency and allows us to
serve a large variety of customers' needs without significantly changing or
modifying equipment.

Growth of our tractor and trailer fleets is determined by market
conditions, and our experience and expectations regarding equipment utilization.
In acquiring revenue equipment, we consider a number of factors, including
economy, price, rate environment, technology, warranty terms, manufacturer
support, driver comfort, and resale value.

We have predominantly acquired standardized tractors manufactured by
Freightliner or Volvo and trailers manufactured by Wabash. We have adopted an
equipment configuration that meets a wide variety of customer needs and
facilitates customer shipping flexibility. We use light weight tractors and high
cube trailers to handle both high weight and high volume shipments.
Standardization of our fleet allows us to operate with a minimum spare parts
inventory and simplifies driver training and equipment maintenance. We adhere to
a comprehensive maintenance program that minimizes downtime and optimizes the
resale value of our equipment. We perform routine servicing and maintenance of
our equipment at most of our regional terminal facilities, thus avoiding costly
on-road repairs and out-of-route trips. We have been upgrading our trailer fleet
through the purchase of Wabash Duraplate(TM) trailers, which have a considerably
longer estimated useful life than the older model trailers that they replace.
Our current policy is to replace most of our tractors within 38 to 44 months
after purchase and to replace our trailers over a six to ten year period. We
believe this replacement policy enhances our ability to attract drivers,
stabilizes maintenance expense, and maximizes equipment utilization. Changes in
the current market for used tractors, and difficult market conditions faced by
tractor manufacturers, may result in price increases that would cause us to
retain our equipment for a longer period, which may result in increased
operating expenses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results -
Increased prices for, or increased costs of operating, new revenue equipment and
decreases in the value of used revenue equipment may materially and adversely
affect our earnings and cash flow," below.

The Environmental Protection Agency (the "EPA") implemented new tractor
engine design requirements effective October 1, 2002 in an effort to reduce
emissions. In response to these new requirements, some manufacturers recently
have adopted significant price increases for new tractors. In addition, the cost
of operating tractors containing the new, EPA-compliant engines is expected to
be somewhat higher than the cost of operating tractors containing engines
manufactured prior to October 1, 2002, due primarily to lower anticipated fuel
efficiency and higher anticipated maintenance expenses. If our cost of new
equipment, or fuel or maintenance expenses, were to increase as a result of our
use of the new, EPA-compliant engines, and we are unable to offset such
increases with fuel surcharges or higher rates, our results of operations would
be adversely affected.

7

We have installed Terion's trailer-tracking system in the majority of our
trailers. We believe that this technology has generated operating efficiencies
and allowed us to reduce the ratio of trailers to tractors in our fleet by
improving our awareness of each trailer's location. This technology also
enhances our ability to substantiate trailer detention charges, leading to
improved collection rates on such charges.

We have Qualcomm's satellite-based mobile communication and
position-tracking system in substantially all of our tractors. The Qualcomm
in-cab communication system is a proven system that links drivers to regional
terminals and corporate headquarters, allowing us to rapidly alter our routes in
response to customer requirements and to eliminate the need for driver stops to
report problems or delays. This system allows drivers to inform dispatchers and
driver managers of the status of routing, loading and unloading, or the need for
emergency repairs, and provides shippers with supply chain visibility. We
believe the Qualcomm communications system allows us to improve fleet control
and the quality of customer service, as well as enhancing our ability to collect
revenue for detention of our tractors.

We historically have financed our equipment acquisitions through cash
generated from operations, lines of credit, and leasing arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," below.

Technology

We previously utilized two-way digital wireless communications services
provided by Terion, Inc. ("Terion") to communicate with our tractors via the
Internet. As a result of Terion's decision in 2001 to discontinue its in-cab
communications business, we have replaced the Terion in-cab units with Qualcomm
in-cab satellite-based communications systems. Terion continues to manufacture
and sell a trailer-tracking technology, and we have installed this technology in
a majority of our trailers. Terion has reorganized under Chapter 11 of the
Federal Bankruptcy Code. See "Revenue Equipment," above, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results - Terion trailer tracking technology may
not be available to us, which could require us to incur the cost of replacement
technology, and adversely affect our trailer utilization and our ability to
assess detention charges," below.

Safety and Risk Management

We are committed to ensuring the safety of our operations. We regularly
communicate with drivers to promote safety and instill safe work habits through
Company media and safety review sessions. We conduct weekly safety training
meetings for our drivers and independent contractors. In addition, we have an
innovative recognition program for driver safety performance, and emphasize
safety through our equipment specifications and maintenance programs. Our Vice
President of Safety is involved in the review of all accidents.

We require prospective drivers to meet higher qualification standards than
those required by the United States Department of Transportation ("DOT"). The
DOT requires our drivers to obtain national commercial drivers' licenses
pursuant to regulations promulgated by the DOT. The DOT also requires that we
implement a drug and alcohol testing program in accordance with DOT regulations.
Our program includes pre-employment, random, and post-accident drug testing.

Within our Company, our President, Chief Financial Officer, and Vice
President of Safety are responsible for securing appropriate insurance coverages
at competitive rates. The primary claims arising in our business consist of
cargo loss and physical damage and auto liability (personal injury and property
damage). We are self-insured for personal injury and property damage liability,
cargo liability, collision and comprehensive up to a maximum limit of $2.0
million per occurrence. We are self-insured for workers' compensation up to a
maximum limit of $500,000 per occurrence.

8

Our insurance policies for 2003 provided for excess personal injury and
property damage liability up to a total of $35.0 million per occurrence and
cargo liability, collision, comprehensive and workers' compensation coverage up
to a total of $10.0 million per occurrence. Subsequent to December 31, 2003, the
$35.0 million in excess coverage per occurrence for personal injury and property
damage has been increased to $40.0 million. Our personal injury and property
damage primary policies also include coverage for punitive damages, subject to
the policy limits outlined above. We also maintain primary and excess coverage
for employee medical expenses and hospitalization, and damage to physical
properties. We carefully monitor claims and participate actively in claims
estimates and adjustments. The estimated costs of our self-insured claims, which
include estimates for incurred but unreported claims, are accrued as liabilities
on our balance sheet.

Competition

The entire trucking industry is highly competitive and fragmented. We
compete primarily with other regional short-to-medium haul truckload carriers,
logistics providers and national carriers. Railroads and air freight also
provide competition, but to a lesser degree. Competition for the freight
transported by us is based on freight rates, service, efficiency, size and
technology. We also compete with other motor carriers for the services of
drivers, independent contractors and management employees. A number of our
competitors have greater financial resources, own more equipment, and carry a
larger volume of freight than we do. We believe that the principal competitive
factors in our business are service, pricing (rates), and the availability and
configuration of equipment that meets a variety of customers' needs. In
addressing our markets, we believe that our principal competitive strength is
our ability to provide timely, flexible and cost-efficient service to shippers.

Regulation

The DOT and various state and local agencies exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, safety, and insurance requirements. In 2003, the DOT
adopted revised hours-of-service regulations for drivers that became effective
on January 4, 2004. These revised regulations represent the most significant
changes to the hours-of-service regulations in over 60 years.

There are several hours of service changes that may have a positive or
negative effect on driver hours (and miles). The new rules allow drivers to
drive up to 11 hours instead of the 10 hours permitted under prior regulations,
subject to the new 14-hour on-duty maximum described below. The rules will
require a driver's off-duty period to be 10 hours, compared to 8 hours under
prior regulations. In general, drivers may not drive beyond 14 hours in a
24-hour period, compared to not being permitted to drive after 15 hours on-duty
under the prior rules. During the new 14-hour consecutive on-duty period, the
only way to extend the on-duty period is by the use of a sleeper berth period of
at least two hours that is later coupled with a second sleeper berth break to
equal 10 hours. Under the prior rules, during the 15-hour on-duty period,
drivers were allowed to take multiple breaks of varying lengths of time, which
could be either off-duty time or sleeper berth time, that did not count against
the 15-hour period. There was no change to the rule that precludes drivers from
driving after being on-duty for a maximum of 70 hours in 8 consecutive days.
However, under the new rules, drivers can "restart" their 8-day clock by taking
at least 34 consecutive hours off duty.

While we believe the 11-hour and the 34-hour restart rules may have a
slight positive effect on driving hours, we anticipate that the 15-hour to
14-hour rule change likely will have a more significant negative impact on
driving hours for the truckload industry. The prior 15-hour rule worked like a
stopwatch and allowed drivers to stop and start their on-duty time as they
chose. The new 14-hour rule is like a running clock. Once the driver goes
on-duty and the clock starts, the driver is limited to one timeout, or the clock
keeps running. As a result of this change, issues that cause driver delays such
as

9

multiple stop shipments, unloading/loading delays, and equipment maintenance
could result in a reduction in driver miles.

We expect that the new rules could initially reduce our and other truckload
carrier's average miles per truck. As time goes on, and the Company and its
drivers gain more experience with the new rules, we anticipate that we will be
able to gradually reduce any decline in average miles per truck. We believe that
we are well equipped to minimize the economic impact of the new hours-of-service
rules on our business. We believe that historically we have been one of the more
successful carriers in identifying, assessing, and collecting charges for
additional services that our drivers perform for our customers. In addition, we
conducted intensive training programs for our driver and non-driver personnel
regarding the new hours-of-service requirements in anticipation of their
effectiveness. Prior to the effectiveness of the new rules, we also initiated
discussions with many of our customers regarding steps that they can take to
assist us in managing our drivers' non-driving activities, such as loading,
unloading, or waiting, and we plan to continue to actively communicate with our
customers regarding these matters in the future. In situations where shippers
are unable or unwilling to take these steps, we expect to assess detention and
other charges to offset losses in productivity resulting from the new
hours-of-service regulations. Although it is still too early to ascertain the
ultimate effect of these rules, based on our initial experience, our preliminary
expectation is that the rules will not significantly disrupt our operations or
materially affect our results of operations.

Our motor carrier operations are also subject to environmental laws and
regulations, including laws and regulations dealing with underground fuel
storage tanks, the transportation of hazardous materials and other environmental
matters, and our operations involve certain inherent environmental risks. We
maintain bulk fuel storage and fuel islands at several of our facilities. Our
operations involve the risks of fuel spillage or seepage, environmental damage,
and hazardous waste disposal, among others. We have instituted programs to
monitor and control environmental risks and assure compliance with applicable
environmental laws. As part of our safety and risk management program, we
periodically perform internal environmental reviews so that we can achieve
environmental compliance and avoid environmental risk. Our Phoenix, Arizona,
Indianapolis, Indiana, and Katy, Texas, facilities were designed, after
consultation with environmental advisors, to contain and properly dispose of
hazardous substances and petroleum products used in connection with our
business. We transport a minimum amount of environmentally hazardous substances
and, to date, have experienced no significant claims for hazardous materials
shipments. If we should fail to comply with applicable regulations, we could be
subject to substantial fines or penalties and to civil and criminal liability.

Our Phoenix facility is located on land identified as potentially having
groundwater contamination resulting from the release of hazardous substances by
persons who have operated in the general vicinity. The area has been classified
as a state superfund site. We have been located at our Phoenix facility since
1990 and, during such time, have not been identified as a potentially
responsible party with regard to the groundwater contamination, and we do not
believe that our operations have been a source of groundwater contamination.

Our Indianapolis property is located approximately 0.1 of a mile east of
Reilly Tar and Chemical Corporation ("Reilly"), a federal superfund site listed
on the National Priorities List for clean-up. The Reilly site has known soil and
groundwater contamination. There are also other sites in the general vicinity of
our Indianapolis property that have known contamination. Environmental reports
obtained by us have disclosed no evidence that activities on our Indianapolis
property have caused or contributed to the area's contamination.

Company operations conducted in industrial areas, where truck terminals and
other industrial activities are conducted, and where groundwater or other forms
of environmental contamination have occurred, potentially expose us to claims
that we contributed to the environmental contamination.

10

We believe we are currently in material compliance with applicable laws and
regulations and that the cost of compliance has not materially affected results
of operations. See "Legal Proceedings," below, for additional information
regarding certain regulatory matters.

In addition to environmental regulations directly affecting our business,
we are also subject to the effects of new tractor engine design requirements
implemented by the EPA effective October 1, 2002. See "Revenue Equipment,"above.

Other Information

We periodically examine investment opportunities in areas related to the
transportation business. Our investment strategy is to add to shareholder value
by investing in industry related businesses that will assist us in strengthening
our overall position in the transportation industry, minimize our exposure to
start-up risk and provide us with an opportunity to realize a substantial return
on our investment. We own a 17% interest in Concentrek, Inc., a logistics
business and a 19% interest in Knight Flight Services, LLC (which operates and
leases a Cessna Citation 560 XL jet aircraft which we use in connection with our
business). See the notes to our consolidated financial statements beginning on
page F-9 of this report for additional information regarding these investments.



Item 2. Properties

Our headquarters and principal place of business is located at 5601 West
Buckeye Road, Phoenix, Arizona on approximately 65 acres. We own approximately
57 acres and approximately 8 acres are leased from Mr. Randy Knight, a director
of the Company and one of our principal shareholders. See the section of our
Proxy Statement to be issued in connection with the Annual Meeting of
Shareholders to be held on May 21, 2004 entitled "Certain Relationships and
Related Transactions - Lease of Property from Affiliate" for additional
information. The following table provides information regarding the Company's
facilities and/or offices:


Company Location Office Shop Fuel Owned or Leased Acres
- ---------------- ------ ---- ---- --------------- -----
Phoenix, Arizona Yes Yes Yes Owned* 65*
Salt Lake City, Utah Yes Yes No Owned 14
Portland, Oregon Yes Yes Yes Leased 5
Denver, Colorado Yes No No Leased 6
Kansas City, Kansas Yes Yes Yes Owned 15
Katy, Texas Yes Yes Yes Owned 12
Indianapolis, Indiana Yes Yes Yes Owned 9
Charlotte, North Carolina Yes Yes No Owned 21
Gulfport, Mississippi Yes Yes No Leased 8
Memphis, Tennessee Yes Yes Yes Owned 18
Atlanta, Georgia Yes No No Leased 7
Las Vegas, Nevada Yes No No Leased 2
Fontana, California Yes No No Owned 14
Mobile, Alabama Yes No No Leased 4
- ------------------
*8 acres are leased from Mr. Randy Knight, a director and principal shareholder of the Company.

In addition, we lease space in various locations for temporary trailer
storage. Management believes that replacement space comparable to these
facilities is readily obtainable, if necessary. The Company also leases excess
trailer drop space at its facilities to other carriers.

11

We believe that our facilities are suitable and adequate for our
present needs. We periodically seek to improve our facilities or identify new
favorable locations. We have not encountered any significant impediments to the
location or addition of new facilities.



Item 3. Legal Proceedings

We are a party to ordinary, routine litigation and administrative
proceedings incidental to our business. These proceedings primarily involve
claims for personal injury or property damage incurred in the transportation of
freight and for personnel matters. We maintain insurance to cover liabilities
arising from the transportation of freight in amounts in excess of
self-insurance retentions. See "Business - Safety and Risk Management." It is
our policy to comply with applicable equal employment opportunity laws and we
periodically review our policies and practices for equal employment opportunity
compliance.



Item 4. Submission of Matters to a Vote of Security Holders

We did not submit any matter to a vote of our security holders during the
fourth quarter of 2003.

12





PART II

Item 5. Market for Company's Common Equity and Related Shareholder Matters

Our common stock is traded under the symbol KNGT on the The NASDAQ Stock
Market - National Market System ("NASDAQ-NMS"). The following table sets forth,
for the periods indicated, the high and low bid information per share of our
common stock as quoted through the NASDAQ-NMS. Such quotations reflect
inter-dealer prices, without retail markups, markdowns or commissions and,
therefore, may not necessarily represent actual transactions.



High Low
2002
First Quarter $24.27 $18.00
Second Quarter $23.45 $17.00
Third Quarter $22.82 $15.35
Fourth Quarter $21.53 $14.67

2003
First Quarter $22.25 $18.35
Second Quarter $25.75 $19.30
Third Quarter $28.36 $24.66
Fourth Quarter $27.55 $23.00

As of February 23, 2004, we had 69 shareholders of record. However, we
believe that many additional holders of our stock are unidentified because a
substantial number of shares are held of record by brokers or dealers for their
customers in street names.

We have never paid cash dividends on our common stock, and it is the
current intention of management to retain earnings to finance the growth of our
business. Future payment of cash dividends will depend upon financial condition,
results of operations, cash requirements, tax treatment, and certain corporate
law requirements, as well as other factors deemed relevant by our Board of
Directors.

See "Securities Authorized for Issuance Under Equity Compensation Plans"
under Item 12 in Part III of this Annual Report for certain information
concerning shares of our common stock authorized for issuance under our equity
compensation plans.

13



Item 6. Selected Financial Data

The selected consolidated financial data presented below as of the end of,
and for, each of the years in the five-year period ended December 31, 2003, are
derived from our Consolidated Financial Statements. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," below, and the Consolidated
Financial Statements and Notes thereto included in Item 8 of this Form 10-K.
Certain risks and other factors that may affect our results of operations and
future performance results are set forth below. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results."

Years Ended December 31,
------------------------

2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollar amounts in thousands, except per share amounts and operating data)
------------------------------------------------------------------------
Statements of Income Data:
Revenue, before fuel surcharge $ 326,856 $ 279,360 $ 241,679 $ 207,406 $ 151,490
Fuel surcharge 13,213 6,430 9,139 9,453 969
Total revenue 340,069 285,790 250,818 216,859 152,459
Operating expenses 280,620 238,296 211,266 184,836 126,548
Income from operations 59,449 47,494 39,552 32,023 25,910
Net interest expense and other (651) (149) (7,485)(2) (3,418) (296)
Income before income taxes 58,798 47,345 32,067 (2) 28,605 25,614
Net income 35,458 27,935 19,017 (2) 17,745 15,464
Diluted earnings per share(1) .93 .73 .54 (2) .53 .45

Balance Sheet Data (at End of Period):
Working capital $ 69,916 $ 64,255 $ 51,749 $ 27,513 $ 15,887
Total assets 321,226 284,844 241,114 206,984 164,545
Long-term obligations, net of current -0- 12,200 2,715 14,885 11,736
Shareholders' equity 239,923 199,657 167,696 105,121 82,814

Operating Data (Unaudited):
Operating ratio(3) 82.5% 83.4% 84.2% 85.2% 83.0%
Operating ratio, excluding fuel
surcharge(4) 81.8% 83.0% 83.6% 84.6% 82.9%
Average revenue per mile(5) $ 1.28 $ 1.24 $ 1.23 $ 1.23 $ 1.23
Average length of haul (miles) 532 543 527 530 491
Empty mile factor 10.8% 10.7% 10.9% 10.5% 10.5%
Tractors operated at end of period(6) 2,418 2,125 1,897 1,694 1,212
Trailers operated at end of period 6,212 5,441 4,898 4,627 3,350

_________________________________

(1) Net income per share for 2000 and 1999 has been restated to reflect the
stock splits on December 28, 2001 and June 1, 2001.
(2) Includes a pre-tax, non-cash write-off of $5.7 million in 2001 relating to
an investment in Terion, Inc.
(3) Operating expenses as a percentage of total revenue.
(4) Operating expenses, net of fuel surcharge, as a percentage of revenue,
before fuel surcharge. Management believes that that eliminating the impact
of this sometimes volatile source of revenue affords a more consistent
basis for comparing our results of operations from period to period.
(5) Average transportation revenue per mile based upon total revenue, exclusive
of fuel surcharge.

14

(6) Includes: (a) 253 independent contract operated vehicles at December 31,
2003; (b) 209 independent contract operated vehicles at December 31, 2002;
(c) 200 independent contractor operated vehicles at December 31, 2001; (d)
239 independent contractor operated vehicles at December 31, 2000; (e) 281
independent contractor operated vehicles at December 31, 1999.

15

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, the following
discussion contains forward-looking statements that involve risks, assumptions
and uncertainties which are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of
earnings, revenues, or other financial items; any statement of plans,
strategies, and objectives of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Words such as
"believe," "may," "could," "expects," "hopes," "anticipates," and "likely," and
variations of these words, or similar expressions, are intended to identify such
forward-looking statements. Actual events or results could differ materially
from those discussed in forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled "Factors That May Affect Future Results," set forth
below. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statement contained in this Annual Report.

Introduction

Business Overview

We are a dry van truckload carrier based in Phoenix, Arizona. We transport
general commodities for shippers throughout the United States, generally
focusing our operations on short-to-medium lengths of haul. We provide regional
truckload carrier services from our 15 operating divisions located throughout
the United States. Over the past five years we have achieved substantial revenue
and income growth. During this period, our revenue, before fuel surcharge, grew
at a 21% compounded annual rate from $125.0 million in 1998 to $326.9 million in
2003, and our net income grew at a 22% compounded annual rate from $13.3 million
in 1998 to $35.5 million in 2003.

Operating and Growth Strategy

Our operating strategy is focused on the following core elements:

o Focusing on Regional Operations. We seek to operate primarily in
high-density, predictable traffic lanes in selected geographic
regions. We believe our regional operations allow us to obtain greater
freight volumes and higher revenue per mile, and also enhance safety
and driver recruitment and retention.

o Maintaining Operating Efficiencies and Controlling Costs. We focus
almost exclusively on operating dry-vans in distinct geographic and
shipping markets in order to achieve increased penetration of targeted
service areas and higher equipment utilization in dense traffic lanes.
We actively seek to control costs by, among other things, operating a
modern equipment fleet, maintaining a high driver to non-driver
employee ratio, and regulating vehicle speed.

o Providing a High Level of Customer Service. We seek to compete on the
basis of service in addition to price, and offer our customers a broad
range of services to meet their specific needs, including multiple
pick ups and deliveries, on-time pick ups and deliveries within narrow
time frames, dedicated fleet and personnel, and specialized driver
training.

o Using Technology to Enhance Our Business. Our tractors are equipped
with a satellite-based tracking and communications system to permit us
to stay in contact with our drivers, obtain

16

load position updates, and provide our customers with freight
visibility. The majority of our trailers are equipped with tracking
technology to allow us to manage our trailers more effectively,
maintain a low trailer to tractor ratio, efficiently assess detention
fees, and minimize cargo loss.

The primary source of our revenue growth has been our ability to open new
regional facilities in certain geographic areas and operate these facilities at
a profit. During 2003, we established presences in Atlanta, Georgia and Denver,
Colorado, and opened a regional facility in Las Vegas, Nevada in February 2004.
Based on our current expectations concerning the economy, we anticipate opening
two additional regional facilities in 2004 and adding 350 to 400 new tractors
system-wide during the year. As part of our growth strategy, we also
periodically evaluate acquisition opportunities and we will continue to consider
acquisitions that meet our financial and operating criteria.

Revenue and Expenses

We primarily generate revenue by transporting freight for our customers.
Generally, we are paid by the mile for our services. We enhance our revenue by
charging for tractor and trailer detention, loading and unloading activities,
and other specialized, as well as through the collection of fuel surcharges to
mitigate the impact of increases in the cost of fuel. The main factors that
affect our revenue are the revenue per mile we receive from our customers, the
percentage of miles for which we are compensated, and the number of miles we
generate with our equipment. These factors relate, among other things, to the
general level of economic activity in the United States, inventory levels,
specific customer demand, the level of capacity in the trucking industry, and
driver availability. Going forward, the recently effective revised
hours-of-service regulations could have a negative impact on our miles per truck
if they reduce the amount of time that our drivers spend driving. To the extent
we are not able to offset any such impact through the collection of fees from
shippers who retain our equipment or drivers, our revenue would be adversely
affected.

For much of the past three years, economic activity in the United States
has been somewhat sluggish, which has limited to some extent our ability to
obtain rate increases. During the second half of 2003, however, the United
States economy experienced strong growth, which many forecasters anticipate will
continue throughout 2004. Business inventory levels also improved in late 2003.
We believe that if the economy continues to improve and inventory levels
continue to increase, we should experience stronger and more stable freight
demand among current and prospective customers in 2004 than we experienced in
2001, 2002, and the first half of 2003. Historically, the excess capacity in the
transportation industry has limited our ability to improve rates. Over the past
two years, the transportation industry has seen some reduction in capacity. We
believe that the factors described above contributed to the 3.4% year-over-year
improvement in our average revenue per mile in 2003. We hope that in 2004, lower
capacity coupled with stronger freight demand will continue to provide us with
better pricing power.

The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and owner-operator costs, which are recorded under purchased
transportation. Expenses that have both fixed and variable components include
maintenance and tire expense and our total cost of insurance and claims. These
expenses generally vary with the miles we travel, but also have a controllable
component based on safety, fleet age, efficiency, and other factors. Our main
fixed costs are the acquisition and financing of long-term assets, such as
revenue equipment and operating terminals and the compensation of non-driver
personnel. Effectively controlling our expenses is an important element of
assuring our profitability. The primary measure we use to evaluate our
profitability is operating ratio, excluding the impact of fuel surcharge revenue
(operating expenses, net of fuel surcharge, as a percentage of revenue, before
fuel surcharge). We view any operating ratio, whether for the Company or any
operations center, in excess of 85% as unacceptable performance.

17

Recent Results of Operations and Year-End Financial Condition

For the year ended December 31, 2003, our results of operations improved as
follows versus the 2002 fiscal year:

o Revenue, before fuel surcharge, increased 17.0%, to $326.9 million
from $279.4 million;

o Net income increased 27.2%, to $35.5 million from $27.9 million; and

o Net income per diluted share increased to $0.93 from $0.73.

During the fourth quarter of 2003, we added approximately 64 new tractors
and experienced a temporary challenge attracting a sufficient number of drivers
to optimize utilization of our expanded tractor fleet. In response to this
challenge, we placed additional emphasis on our driver recruiting and retention
efforts. This emphasis on recruiting and retention, coupled with one cent per
mile increases in driver compensation implemented in September 2003 and January
2004, which will affect our costs going forward, have resulted in nearly all of
our trucks being fully seated at this time.

We invested significant time and resources training our driver and
non-driver personnel and communicating with our customers in preparation for the
effectiveness of the new hours-of-service rules on January 4, 2004. We are
currently operating under the new rules, and have experienced minimal disruption
in our operations to date. Although it is too early to ascertain the ultimate
impact of the new rules, based on our initial experience, our preliminary
expectation is that they will not materially affect our results of operations.
See "Business - Regulation," above.

At December 31, 2003 our balance sheet reflected $40.6 million in cash and
investments, no long-term debt, after paying off the remaining $12.2 million
balance on our line of credit during the fourth quarter of 2003, and
shareholders' equity of $239.9 million. For the year, we generated $84.4 million
in cash flow from operations and used $70.3 million for net capital
expenditures, producing $14.1 million in free cash flow. Based on our recent
historical results, we expect our operations to continue to fund growth and
generate free cash flow, absent any significant acquisitions.

We define free cash flow as net cash provided by operating activities less
purchases of property and equipment, net. Both measures used to compute free
cash flow are set forth in our consolidated statements of cash flows included
elsewhere in this report. Management believes that free cash flow provides
useful information to investors regarding the Company's ability to generate cash
for purposes such as reinvesting in our business and making acquisitions. Free
cash flow does not, however, take into account debt service requirements, if
any, and other non-discretionary expenditures and therefore may not necessarily
be indicative of amounts of cash available for discretionary uses. Free cash
flow should be considered in addition to, and not in lieu of, net cash provided
by, or used in, operating, investing, or financing activities, net income, and
other measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States of America.

Risks Associated with Our Business

We operate in an economic and legal environment that involves many
different risks. These risks range from such unpredictable matters as the impact
of new DOT revised hours-of-service regulations to continued unrest in the
Middle East to general economic conditions and the pace of overall economic
growth. We have described below, a number of these risks. See "Factors that May
Affect Future Results," below. We expect that we will continue to be subject to
these risks and to other risks that we have not anticipated. We will continue to
rely upon our employees and upon our operating strategy to

18

address these risks as best we can and we will continue to work towards
delivering value to our shareholders.

Results of Operations

The following table sets forth the percentage relationships of our expense
items to total revenue and revenue, before fuel surcharge, for each of the three
fiscal years indicated below. Fuel expense as a percentage of revenue, before
fuel surcharge, is calculated using fuel expense, net of surcharge. Management
believes that eliminating the impact of this sometimes volatile source of
revenue affords a more consistent basis for comparing our results of operations
from period to period.


2003 2002 2001 2003 2002 2001

Total revenue 100.0% 100.0% 100.0% Revenue, before fuel surcharge 100.0% 100.0% 100.0%
- ------------- ------------------------------
Operating expenses: Operating expenses:
Salaries, wages and benefits 30.8 32.8 32.6 Salaries, wages and benefits 32.0 33.5 33.8
Fuel 16.6 15.6 15.5 Fuel(1) 13.3 13.6 12.3
Operations and maintenance 6.0 6.0 5.5 Operations and maintenance 6.2 6.1 5.7
Insurance and claims 4.9 4.3 4.1 Insurance and claims 5.1 4.4 4.2
Operating taxes and licenses 2.7 2.6 2.8 Operating taxes and licenses 2.8 2.6 2.9
Communications 0.9 0.8 0.8 Communications 0.9 0.9 1.0
Depreciation and amortization 8.8 8.0 7.3 Depreciation and amortization 9.2 8.2 7.6
Lease expense - revenue Lease expense - revenue
equipment 2.2 3.3 3.4 equipment 2.4 3.4 3.5
Purchased transportation 7.4 7.6 9.4 Purchased transportation 7.7 7.8 9.7
Miscellaneous operating Miscellaneous operating
expenses 2.2 2.4 2.8 expenses 2.2 2.5 2.9
----- ----- ----- ----- ----- -----
Total operating expenses 82.5 83.4 84.2 Total operating expenses 81.8 83.0 83.6
----- ----- ----- ----- ----- -----
Income from operations 17.5 16.6 15.8 Income from operations 18.2 17.0 16.4
Net interest and other expense(2) 0.2 0.0 3.0 Net interest and other expense 0.2 0.1 3.1
----- ----- ----- ----- ----- -----
Income before income taxes(2) 17.3 16.6 12.8 Income before income taxes 18.0 16.9 13.3
Income taxes(2) 6.9 6.8 5.2 Income taxes 7.1 6.9 5.4
----- ----- ----- ----- ----- -----
Net Income(2) 10.4% 9.8% 7.6% Net Income 10.9% 10.0% 7.9%
===== ===== ===== ===== ===== =====


(1) Net of fuel surcharge.
(2) Includes a pre-tax, non-cash write-off of $5,679,000 in 2001 relating to an
investment in Terion, Inc.

A discussion of our results of operations for the periods 2003 to 2002 and
2002 to 2001 is set forth below.

Fiscal 2003 Compared to Fiscal 2002

Our total revenue for 2003 increased to $340.1 million from $285.8 million
for 2002. Total revenue included $13.2 million of fuel surcharge revenue in the
2003 period and $6.4 million of fuel surcharge revenue in the 2002 period. In
discussing our results of operations we use revenue, before fuel surcharge, (and
fuel expense, net of surcharge), because management believes that eliminating
the impact of this sometimes volatile source of revenue affords a more
consistent basis for comparing our results of operations from period to period.
We also discuss the changes in our expenses as a percentage of revenue, before
fuel surcharge, rather than absolute dollar changes. We do this because we
believe the high variable cost nature of our business makes a comparison of
changes in expenses as a percentage of revenue more meaningful than absolute
dollar changes.

Revenue, before fuel surcharge, increased by 17.0% to $326.9 million in
2003 from $279.4 million in 2002. This increase primarily resulted from the
expansion of our customer base and increased volume from existing customers,
that was facilitated by a continued growth of our tractor and trailer fleet,
which increased by 13.8% to 2,418 tractors (including 253 owned by independent
contractors) as of

19

December 31, 2003, from 2,125 tractors (including 209 owned by independent
contractors) as of December 31, 2002. In addition, our average revenue per mile
(exclusive of fuel surcharge) increased to $1.281 per mile for 2003, from $1.239
per mile for the same period in 2002.

Salaries, wages and benefits expense decreased as a percentage of revenue,
before fuel surcharge, to 32.0% in 2003 from 33.5% in 2002, primarily due to the
improved efficiencies in the Company's personnel operations, improved
utilization of revenue equipment, and a larger revenue base over which these
largely fixed expenses were spread. As of December 31, 2003, 89.5% of our fleet
was operated by Company drivers, compared to 90.2% as of December 31, 2002. For
our drivers, we record accruals for workers' compensation benefits as a
component of our claims accrual, and the related expense is reflected in
salaries, wages and benefits in our consolidated statements of income.

Fuel expense, net of fuel surcharge, decreased, as a percentage of revenue
before fuel surcharge, to 13.3% for 2003 from 13.6% in 2002, due mainly to
improved collection of fuel surcharge revenue during 2003, which more than
offset higher fuel prices. The Company maintains a fuel surcharge program to
assist us in recovering a portion of increased fuel costs. For the year ended
December 31, 2003, fuel surcharge was $13.2 million, compared to $6.4 million
for the same period in 2002. As a percentage of total revenue, including fuel
surcharge, fuel expense increased to 16.6% for 2003 from 15.6% in 2002 as a
result of higher fuel prices. We believe that higher fuel prices may continue to
adversely affect our operating expenses throughout 2004, and that continued
unrest in the Middle East could have a significant adverse effect on fuel
prices. See "Factors that May Affect Future Results - If fuel prices increase
significantly, our results of operations could be adversely affected," below. We
have entered into fuel hedging agreements as a means of managing the cost of our
fuel. See "Quantitative and Qualitative Disclosure About Market Risk - Commodity
Price Risk," below.

Operations and maintenance expense increased as a percentage of revenue,
before fuel surcharge, to 6.2% for 2003 from 6.1% in 2002. This increase was
primarily due to the slight aging our fleet. Independent contractors pay for the
maintenance on their own vehicles.

Insurance and claims expense increased as a percentage of revenue, before
fuel surcharge, to 5.1% for 2003, compared to 4.4% for 2002, primarily as a
result of an increase in insurance premiums and higher self-insurance retention
levels assumed by the Company. See "Business - Safety Risk Management," above.

Operating taxes and license expense as a percentage of revenue, before fuel
surcharge, increased to 2.8% for 2003 from 2.6% for 2002. The increase resulted
primarily from an increase in miles run in higher tax rate states, along with
increased licensing rates in certain states, for the 12 month period ended
December 31, 2003.

Communications expenses as a percentage of revenue, before fuel surcharge,
remained relatively constant at 0.9% for both 2003 and 2002.

Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 9.2% for 2003 from 8.2% in 2002. This increase was
primarily related to an increase in the percentage of our Company fleet
comprised of purchased vehicles. At December 31, 2003, 82% of our Company fleet
was comprised of purchased vehicles, compared to 74% at December 31, 2002. Our
Company fleet includes purchased vehicles and vehicles acquired under operating
leases, while our total fleet includes vehicles in our Company fleet as well as
vehicles provided by independent contractors.

Lease expense for revenue equipment as a percentage of revenue, before fuel
surcharge, decreased to 2.4% for 2003, compared to 3.4% for 2002, primarily as a
result of a decrease in the percentage of the Company fleet comprised of
vehicles held under operating leases. Several of our operating lease agreements
have variable payment terms that are amortized on a straight-line basis.

20

Purchased transportation expense as a percentage of revenue, before fuel
surcharge, remained relatively constant at 7.7% and 7.8%for 2003 and 2002,
respectively. As of December 31, 2003, 10.5% of our fleet was operated by
independent contractors, compared to 9.8% at December 31, 2002. As of December
31, 2003, our total fleet included 253 tractors owned and operated by
independent contractors, compared to 209 tractors owned and operated by
independent contractors at December 31, 2002. Purchased transportation
represents the amount an independent contractor is paid to haul freight for us
on a mutually agreed upon per-mile basis. To assist us in continuing to attract
independent contractors, we may provide financing to qualified independent
contractors to assist them in acquiring revenue equipment. As of December 31,
2003, we had $877,000 in loans outstanding to independent contractors to
purchase revenue equipment. These loans are secured by liens on the revenue
equipment we finance.

Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.2% for 2003 from 2.5% in 2002, primarily due to
increases in revenue per mile as well as increases in overall revenue which
spread these generally fixed costs over greater revenue.

As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 81.8% for 2003, compared to 83.0% for 2002.

Net interest expense as a percentage of revenue, before fuel surcharge,
remained at less than 1.0% for both 2003 and 2002. We reduced our outstanding
debt to $0.0 at December 31, 2003, compared to $14.9 million at December 31,
2002.

Other expense for 2003 was comprised of an adjustment to the carrying value
of an investment the Company has in an entity whose primary asset is a jet
aircraft. Other expense as a percentage of revenue, before fuel surcharge, was
0.1% for 2003.

Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement income
and income for tax reporting. Our effective tax rate declined from 41.0% in 2002
to 39.7% for 2003 as a result of state tax planning strategies.

Income tax expense as a percentage of revenue, before fuel surcharge,
increased to 7.1% for 2003, from 6.9% for 2002, primarily due to the overall
decrease in our operating ratio.

As a result of the preceding changes, our net income, as a percentage of
revenue before fuel surcharge, was 10.9% for 2003, compared to 10.0% in 2002.

Fiscal 2002 Compared to Fiscal 2001

Revenue, before fuel surcharge, increased by 15.6% to $279.4 million in
2002 from $241.7 million in 2001. This increase primarily resulted from the
expansion of our customer base and increased volume from existing customers,
that was facilitated by a continued growth of our tractor and trailer fleet,
which increased by 12.0% to 2,125 tractors (including 209 owned by independent
contractors) as of December 31, 2002, from 1,897 tractors (including 200 owned
by independent contractors) as of December 31, 2001. Additionally, our average
revenue per mile (exclusive of fuel surcharge) increased to $1.239 per mile for
2002, from $1.227 per mile in 2001.

Salaries, wages and benefits expense decreased as a percentage of revenue,
before fuel surcharge, to 33.5% in 2002 from 33.8% in 2001, primarily due to the
improved efficiencies in the Company's personnel operations, improved
utilization of revenue equipment, and a larger revenue base over which these
largely fixed expenses were spread. As of December 31, 2002, 90.2% of our fleet
was operated by Company drivers, compared to 89.5% as of December 31, 2001. For
our drivers, we record accruals for

21

workers' compensation benefits as a component of our claims accrual, and the
related expense is reflected in salaries, wages and benefits in our consolidated
statements of income.

Fuel expense, net of fuel surcharge, increased as a percentage of revenue,
before fuel surcharge, to 13.6% for 2002 from 12.3% in 2001, due mainly to lower
collection of fuel surcharge revenue during 2002 compared to 2001, along with
the increase in the percentage of our fleet comprised of Company vehicles (as
opposed to vehicles provided by independent contractors), from 89.5% in 2001 to
90.2% in 2002. These factors were partially offset by lower average fuel prices
in 2002 compared to 2001. The Company maintains a fuel surcharge program to
assist us in recovering a portion of increased fuel costs. For the year ended
December 31, 2002, fuel surcharge was $6.4 million, compared to $9.1 million for
the same period in 2001 as a result of lower fuel prices. As a percentage of
total revenue, including fuel surcharge, fuel expense remained relatively
constant at 15.6% for 2002 and 15.5% for 2001, as lower fuel prices in 2002 were
offset by lower collection of fuel surcharge revenue during that year.

Operations and maintenance expense increased as a percentage of revenue,
before fuel surcharge, to 6.1% for 2002 from 5.7% in 2001. This increase was
primarily due to a slight aging of the Company's fleet, along with the increase
in the ratio of Company operated vehicles to independent contractor operated
vehicles. Independent contractors pay for the maintenance on their own vehicles.

Insurance and claims expense increased as a percentage of revenue, before
fuel surcharge, to 4.4% for 2002, compared to 4.2% for 2001, primarily as a
result of the increase in insurance premiums and an increase in the frequency of
claims experienced by the Company.

Operating taxes and license expense as a percentage of revenue, before fuel
surcharge, decreased to 2.6% for 2002 from 2.9% for 2001. The decrease resulted
primarily from a relative increase in miles run in lower tax rate states and an
increase in equipment utilization for 2002.

Communications expenses as a percentage of revenue, before fuel surcharge,
remained relatively consistent at 0.9% and 1.0% for 2002 and 2001, respectively.

Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 8.2% for 2002 from 7.6% in 2001. This increase was
primarily related to the increase in the percentage of our Company fleet
comprised of purchased vehicles. At December 31, 2002, 74% of our Company fleet
was comprised of purchased vehicles, compared to 67% at December 31, 2001. Our
Company fleet includes purchased vehicles and vehicles acquired under operating
leases, while our total fleet includes vehicles in our Company fleet as well as
vehicles provided by independent contractors.

Lease expense for revenue equipment as a percentage of revenue, before fuel
surcharge, was 3.4% for 2002, compared to 3.5% for 2001. Several of our
operating lease agreements have variable payment terms that are amortized on a
straight-line basis.

Purchased transportation expense as a percentage of revenue, before fuel
surcharge, decreased to 7.8% in 2002 from 9.7% in 2001, primarily as a result of
a decrease in the percentage of our total fleet comprised of independent
contractors (as opposed to Company drivers). As of December 31, 2002, 9.8% of
our fleet was operated by independent contractors, compared to 10.5% at December
31, 2001. As of December 31, 2002, the Company had 209 tractors owned and
operated by independent contractors, compared to 200 tractors owned and operated
by independent contractors at December 31, 2001. Purchased transportation
represents the amount an independent contractor is paid to haul freight for us
on a mutually agreed per-mile basis. To assist us in continuing to attract
independent contractors, we provide financing to qualified independent
contractors to assist them in acquiring revenue equipment. As of December 31,
2002, we had $2.4 million in loans outstanding to independent contractors to
purchase revenue equipment. These loans are secured by liens on the revenue
equipment we finance.

22

Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.5% for 2002 from 2.9% in 2001, primarily due to
decreased travel expenses and increases in equipment utilization.

As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 83.0% for 2002, compared to 83.6% for 2001.

Net interest and other expense as a percentage of revenue, before fuel
surcharge, decreased to 0.1% for 2002 from 0.7% for 2001, excluding the
write-off in 2001 of our $5.7 million investment in Terion, Inc. This decrease
was primarily the result of the Company's ability to reduce its outstanding debt
to approximately $14.9 million at December 31, 2002, compared to $18.1 million
at December 31, 2001. Debt reduction was facilitated, in part, by proceeds
obtained from the public offering of our Common Stock that closed November 7,
2001. Also, our interest income was higher in 2002 compared to 2001 due to a
higher average cash balance in 2002.

Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement income
and income for tax reporting. Our effective tax rate was remained relatively
constant at 41.0% for 2002 and 40.7% for 2001.

Income tax expense as a percentage of revenue, before fuel surcharge,
increased to 6.9% for 2002, from 5.4% for 2001, primarily due to the recording
of the non-recurring charge of our investment in Terion in 2001, as discussed
below, along with a change in the mix of state tax liabilities.

As a result of the preceding changes, our net income, as a percentage of
revenue before fuel surcharge, was 10.0% for 2002, compared to 7.9% in 2001.
This percentage was 9.3% for 2001, excluding the write-off of our investment in
Terion, as discussed below.

During the third quarter of 2001, we recorded a non-recurring charge of
$5.7 million to record the write-off of our entire investment in Terion, Inc.
("Terion"), a communications technology company, that we made during 1998 and
1999. We owned less than four percent of Terion and did not derive any revenue
from our investment. We elected to write-off our investment for financial
accounting purposes after Terion announced that it would cease operating its
on-cab communications system. In January 2002, Terion filed for protection under
Chapter 11 of the federal bankruptcy laws. The impact on earnings per diluted
share was $0.10 for the year ended December 31, 2001. This write-off resulted in
a reduction of net income, as a percentage of revenue before fuel surcharge, of
1.5% for the fiscal year ended December 31, 2001.

Liquidity and Capital Resources

The growth of our business has required, and will continue to require, a
significant investment in new revenue equipment. Our primary sources of
liquidity have been funds provided by operations, and to a lesser extent lease
financing arrangements, issuances of equity securities, and borrowings under our
line of credit.

Net cash provided by operating activities was approximately $84.4 million,
$55.5 million, and $46.2 million for the years ended December 31, 2003, 2002 and
2001, respectively. The increase for 2003 was primarily the result of an
increase in revenue coupled with an improvement in our operating ratio, an
increase in claims reserve balances resulting from higher self insurance levels,
and improvements made in our collection of accounts receivable.

Capital expenditures for the purchase of revenue equipment, net of
trade-ins, office equipment, land and leasehold improvements, totaled $70.3
million, $41.8 million and $30.4 million for the years

23

ended December 31, 2003, 2002 and 2001, respectively. We currently anticipate
capital expenditures, net of trade-ins, of approximately $80.0 million for 2004.
We expect these capital expenditures will be applied primarily to acquire new
revenue equipment.

Net cash used for financing activities was approximately $12.7 million and
$1.1 million for the years ended December 31, 2003 and 2002, respectively. Net
cash used for financing during these periods was primarily for the payments on
our line of credit and long-term debt, which was retired in full during the
fourth quarter of 2003. Net cash provided by financing activities was
approximately $5.9 million for the year ended December 31, 2001, primarily as a
result of the net proceeds of an underwritten stock offering, partially offset
by principal and interest payments on debt.

At December 31, 2003, we did not have any borrowing outstanding. We
currently maintain a line of credit, which permits revolving borrowings and
letters of credit totaling $10.0 million. At December 31, 2003, the line of
credit consisted solely of issued but unused letters of credit totaling $7.7
million. Historically this line of credit had been maintained at $50.0 million.
However, due to our continued strong positive cash position, and in an effort to
minimize bank fees, we do not believe a revolving credit facility or term loans
are necessary to meet our current and anticipated near-term cash needs. We
believe any necessary increase in our line of credit to provide for a revolving
line or credit or term loans could be accomplished quickly as needed. We are
obligated to comply with certain financial covenants under our line of credit
and were in compliance with these covenants at December 31, 2003, 2002 and 2001.

As of December 31, 2003, we held $40.6 million in cash and cash
equivalents. Management believes we will be able to finance our near term needs
for working capital over the next twelve months, as well as acquisitions of
revenue equipment during such period, with cash balances, cash flows from
operations, and borrowings and operating lease financing believed to be
available from financing sources. We will continue to have significant capital
requirements over the long-term, which may require us to incur debt or seek
additional equity capital. The availability of additional capital will depend
upon prevailing market conditions, the market price of our common stock and
several other factors over which we have limited control, as well as our
financial condition and results of operations. Nevertheless, based on our recent
operating results, current cash position, anticipated future cash flows, and
sources of financing that we expect will be available to us, we do not expect
that we will experience any significant liquidity constraints in the foreseeable
future.

Off-Balance Sheet Transactions

Our liquidity is not materially affected by off-balance sheet transactions.
Like many other trucking companies, historically we have utilized non-cancelable
operating leases to finance a portion of our revenue equipment acquisitions. At
December 31, 2003, we leased 393 tractors under operating leases with varying
termination dates ranging from January 2004 to April 2006. Vehicles held under
operating leases are not carried on our balance sheet, and lease payments in
respect of such vehicles are reflected in our income statements in the line item
"Lease expense - revenue equipment." Our rental expense related to operating
leases was $7.6 million in 2003, compared to $9.4 million in 2002. The total
amount outstanding under operating leases as of December 31, 2003, was $7.2
million, with $3.8 million due in the next 12 months. The effective annual
interest rates under these operating leases range from 5.2% to 6.6%.

24




Tabular Disclosure of Contractual Obligations

The following table sets forth, as of December 31, 2003, our contractual
obligations and payments due by corresponding period for our short and long term
operating expenses, including operating leases and other commitments.



Contractual Obligations Payments (in thousands) due by period
- ------------------------------------------------ ---------------------------------------------------------------------
Less than 1 More than 5
Total year 1-3 years 3-5 years years
----------- -------------- ------------- ------------- --------------
Operating Lease Obligations(1) $7,162 $3,781 $3,381 -- --
Purchase Obligations (Revenue Equipment)(2) $46,500 $46,500 -- -- --
----------- -------------- ------------- ------------- --------------
Total $53,662 $50,281 $3,381 -- --
=========== ============== ============= ============= ==============


(1) Operating Lease Obligations consists of amounts due under non-cancelable
operating leases for the leasing of certain revenue equipment.

(2) Purchase Obligations (Revenue Equipment) represents the total purchase
price under commitments to purchase tractors and trailers scheduled for
delivery throughout 2004. Net of estimated trade-in values, the estimated
amount due under these commitments is approximately $39.0 million.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported
amounts of assets, liabilities, revenue and expenses in our consolidated
financial statements and accompanying notes. Management bases its estimates on
historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management's best knowledge of current
events and actions that may impact the Company in the future, actual results may
differ from these estimates and assumptions. Our critical accounting policies
are those that affect our financial statements materially and involve a
significant level of judgment by management.

Revenue Recognition. We generally recognize revenue upon delivery of a
shipment.

Depreciation. Property and equipment are stated at cost. Depreciation on
property and equipment is calculated by the straight-line method over the useful
life of the property or equipment, which ranges from five to thirty years, with
salvage values ranging from 10% to 40%. We periodically evaluate the useful
lives and salvage values of our property and equipment based upon, among other
things, our experience with similar assets, including gains or losses upon
dispositions of such assets.

Claims Reserves and Estimates. Reserves and estimates for claims is another
of our critical accounting policies. The primary claims arising for us consist
of cargo liability, personal injury, property damage, collision and
comprehensive, workers' compensation, and employee medical expenses. We maintain
self-insurance levels for these various areas of risk and have established
reserves to cover these self-insured liabilities. We also maintain insurance to
cover liabilities in excess of the self-insurance amounts. The claims reserves
represent accruals for the estimated uninsured portion of pending claims,
including adverse development of known claims, as well as incurred but not
reported claims. These estimates are based on historical information, primarily
our own claims experience and the experience of our third party administrator,
along with certain assumptions about future events. Changes in assumptions as
well as changes in actual experience could cause these estimates to change in
the near

25

term. The significant recent increases in our self-insured retention for
personal injury and property damage claims, from $100,000 in 2000 to $2.0
million currently, amplify the importance and potential impact of these
estimates.

Estimates also are involved in other aspects of our business. For instance,
we make similar types of estimates concerning the collectibility of our accounts
receivable and the concentration of our credit exposure based on our historical
experience and certain assumptions about future events.

Accounting for Income Taxes. Significant management judgment is required in
determining our provision for income taxes and in determining whether deferred
tax assets will be realized in full or in part. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. When it is more likely than not that all or some portion
of specific deferred tax assets, such as certain tax credit carryovers, will not
be realized, a valuation allowance must be established for the amount of the
deferred tax assets that are determined not to be realizable. A valuation
allowance for deferred tax assets has not been deemed necessary due to the
Company's profitable operations. Accordingly, if the facts or financial results
were to change, thereby impacting the likelihood of realizing the deferred tax
assets, judgment would have to be applied to determine the amount of valuation
allowance required in any given period. We continually evaluate strategies that
would allow for the future utilization of our deferred tax assets and currently
believe we have the ability to enact strategies to fully realize our deferred
tax assets should our earnings in future periods not support the full
realization of the deferred tax assets.

Seasonality

In the transportation industry, results of operations frequently show a
seasonal pattern. Seasonal variations may result from weather or from customer's
reduced shipments after the busy winter holiday season. To date, our revenue has
not shown any significant seasonal pattern. Because we operate significantly in
Arizona, California and the western United States, winter weather generally has
not adversely affected our business. Continued expansion of our operations in
the Midwest, Rocky Mountain area, East Coast, and the Southeast could expose us
to greater operating variances due to seasonal weather in these regions.
Shortages of energy and related issues in California, and elsewhere in the
western United States, could result in an adverse effect on our operations and
demand for our services if these shortages continue or increase. This risk may
also exist in other regions in which we operate, depending upon availability of
energy.

26



Selected Quarterly Financial Data

The following table sets forth certain unaudited information about our
revenue and results of operations on a quarterly basis for 2003 and 2002 (in
thousands, except per share data):


2003
-----------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------------------ ------------------- ------------------ --------------------
Revenue, before fuel surcharge $ 73,551 $ 81,790 $ 84,445 $ 87,070
Income from operations 11,853 14,958 15,818 16,820
Net Income 7,077 8,950 9,463 9,968
Earnings per Common share:
Basic $ 0.19 $ 0.24 $ 0.25 $ 0.27
------------------ ------------------- ------------------ -------------------
Diluted $ 0.19 $ 0.23 $ 0.25 $ 0.26
------------------ ------------------- ------------------ -------------------

2002
-----------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------------------ ------------------- ------------------ -------------------

Revenue, before fuel surcharge $ 61,890 $ 68,307 $ 72,777 $ 76,386
Income from operations 9,410 11,315 12,498 14,271
Net Income 5,553 6,704 7,437 8,241
Earnings per Common share:
Basic $ 0.15 $ 0.18 $ 0.20 $ 0.22
------------------ ------------------- ------------------ -------------------
Diluted $ 0.15 $ 0.18 $ 0.20 $ 0.22
------------------ ------------------- ------------------ -------------------


Recently Adopted and to be Adopted Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, recognition
of costs to consolidate facilities or relocate employees and recognition of
costs for termination of benefits provided to employees that are involuntarily
terminated under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred compensation contract.
SFAS No. 146 applies to exit or disposal activities initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on our
consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. This interpretation also clarifies that a guarantor is required to
recognize at the inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
this interpretation apply to guarantees issued or modified after December 31,
2002. The disclosure requirements apply to financial statements for interim and
annual periods ending after December 31, 2002. The application of this
interpretation did not have a material effect on our consolidated financial
statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51.", which was then
revised in December 2003. This interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in this
interpretation. This interpretation applies to variable interests in variable
interest entities created after

27

January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February l, 2003, this
interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after December 15, 2003. The
application of this interpretation is not expected to have a material effect on
our consolidated financial statements.

In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." It applies to contracts entered into or modified after June
30, 2003, except as stated within the statement, and is to be applied
prospectively. The adoption of SFAS No. 149 did not have a material impact on
our consolidated financial statements.

On May 15, 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. Generally, SFAS
No. 150 applies to financial instruments entered into or modified after May 31,
2003 and otherwise became effective at the beginning of the first interim period
beginning after June 15, 2003. We adopted the provisions of SFAS No. 150 on July
1, 2003. The adoption of SFAS No. 150 did not have a material impact on our
consolidated financial statements.

In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB No. 104"), "Revenue Recognition", which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not have a material effect on
our consolidated financial statements.

Factors That May Affect Future Results

Our future results may be affected by a number of factors over which we
have little or no control. Fuel prices, insurance and claims costs, liability
claims, regulatory requirements that may increase costs or decrease efficiency,
including revised hours-of-service requirements for drivers, the availability of
qualified drivers, interest rates, fluctuations in the resale value of revenue
equipment, economic and customer business cycles and shipping demands are
factors over which we have little or no control. Significant increases or rapid
fluctuations in fuel prices, interest rates or insurance costs or liability
claims, and increases in costs of compliance with, or decreases in efficiency
resulting from, regulatory requirements, to the extent not offset by fuel
surcharges and increases in freight rates, as well as downward changes in the
resale value of revenue equipment, could reduce our profitability. Weakness in
the general economy, including a weakness in consumer demand for goods and
services, could adversely affect our customers and our growth and revenues, if
customers reduce their demand for transportation services. Weakness in customer
demand for our services or in the general rate environment may also restrain our
ability to increase rates or obtain fuel surcharges. It is also not possible to
predict the effects of terrorist attacks and subsequent events on the economy or
on customer confidence in the United States, or the impact, if any, on our
future results of operations.

The following issues and uncertainties, among others, should be considered
in evaluating our business and growth outlook.

Our growth may not continue at historic rates

We have experienced significant and rapid growth in revenue and profits
since the inception of our business in 1990. There can be no assurance that our
business will continue to grow in a similar fashion in the future or that we can
effectively adapt our management, administrative, and operational systems to
respond to any future growth. Further, there can be no assurance that our
operating margins will not be adversely affected by future changes in and
expansion of our business or by changes in economic conditions.

28

Ongoing insurance and claims expenses could significantly reduce our
earnings

Our future insurance and claims expenses might exceed historical levels,
which could reduce our earnings. During 2003, we were self-insured for personal
injury and property damage liability, cargo liability, collision and
comprehensive up to a maximum limit of $2.0 million per occurrence up from $1.75
million per occurrence in 2002. Our maximum self-retention for workers'
compensation where a traffic accident is not involved remained constant in 2003
at $500,000 per occurrence. For 2004, we have retained our maximum
self-retention for personal injury and property damage liability, cargo
liability, collision, and comprehensive at $2.0 million per occurrence. We
maintain insurance with licensed insurance companies above the amounts for which
we self-insure. Our insurance policies for 2003 provided for excess personal
injury and property damage liability up to a total of $35.0 million per
occurrence and cargo liability, collision, comprehensive and workers'
compensation coverage up to a total of $10.0 million per occurrence. Subsequent
to December 31, 2003, the $35.0 million in excess coverage per occurrence for
personal injury and property damage has been increased to $40.0 million. Our
personal injury and property damage policies also include coverage for punitive
damages where such coverage is allowed.

If the number of claims for which we are self-insured increases, our
operating results could be adversely affected. After several years of aggressive
pricing in the 1990s, insurance carriers raised premiums and sought higher
self-insurance retention levels, which increased our insurance and claims
expense. The terrorist attacks of September 11, 2001, exacerbated already
difficult conditions in the United States insurance market resulting in
additional increases in our insurance expenses. If these costs continue to
increase, or if the severity or number of claims increase, and if we are unable
to offset the resulting increases in expenses with higher freight rates, our
earnings could be materially and adversely affected.

Increased prices for, or increased costs of operating, new revenue
equipment and decreases in the value of used revenue equipment may materially
and adversely affect our earnings and cash flow.

Our growth has been made possible through the addition of new revenue
equipment. Difficulty in financing or obtaining new revenue equipment (for
example, delivery delays from manufacturers or the unavailability of independent
contractors) could restrict future growth.

We currently have fixed amount repurchase, trade-in, or residual agreements
with equipment manufacturers covering the substantial majority of our tractor
fleet and a considerable portion of our trailer fleet. In some cases, we are
required to purchase a specified quantity of replacement equipment from the
manufacturer in order to obtain the benefit of these agreements. Current
developments in the secondary tractor and trailer resale market have resulted in
a large supply of used tractors and trailers on the market. This has depressed
the market value of used equipment to levels, in some cases significantly below
the prices at which the manufacturers have agreed to repurchase the equipment.
Accordingly, some manufacturers may refuse or be financially unable to keep
their commitments to repurchase equipment according to the terms of our
agreements with them. If manufacturers refuse or unable to meet their
obligations under our agreements with them, or if we decline to purchase the
specified number of replacement units from the manufacturers, we may suffer a
financial loss upon the disposition of our equipment, and could be forced to
write down the value of our used equipment.

The EPA recently adopted new emissions control regulations, which require
progressive reductions in exhaust emissions from diesel engines through 2007,
for engines manufactured in October 2002 and thereafter. In part to offset the
costs of compliance with the new EPA engine design requirements, some
manufacturers have significantly increased new equipment prices and eliminated
or sharply reduced the price of repurchase or trade-in commitments. If new
equipment prices were to

29

increase, or if the price of repurchase commitments by equipment manufacturers
were to decrease, more than anticipated, we may be required to increase our
depreciation and financing costs and/or retain some of our equipment longer,
with a resulting increase in maintenance expenses. To the extent we are unable
to offset any such increases in expenses with rate increases or cost savings,
our results of operations would be adversely affected. Additionally, the cost of
operating the new EPA-compliant engines is expected to be somewhat higher than
the cost of operating engines manufactured prior to October 1, 2002, due
primarily to lower anticipated fuel efficiency and potentially higher
maintenance expenses. If our fuel or maintenance expenses were to increase as a
result of our use of the new, EPA-compliant engines, and we are unable to offset
such increases with fuel surcharges or higher freight rates, our results of
operations would be adversely affected. Further, our business and operations
could be adversely impacted if we experience problems with the reliability of
the new engines. We began operating tractors with engines meeting the EPA
guidelines during 2003. Although we have not experienced any significant
reliability issues with these engines to date, the expenses associated with the
tractors containing these engines have been slightly elevated, primarily as a
result lower fuel efficiency and slightly higher depreciation.

If fuel prices increase significantly, our results of operations could be
adversely affected.

We are subject to risk with respect to purchases of fuel. Prices and
availability of petroleum products are subject to political, economic and market
factors that are generally outside our control. Political events in the Middle
East, Venezuela and elsewhere may also cause the price of fuel to increase.
Because our operations are dependent upon diesel fuel, significant increases in
diesel fuel costs could materially and adversely affect our results of
operations and financial condition if we are unable to pass increased costs on
to customers through rate increases or fuel surcharges. Historically, we have
sought to recover a portion of short-term increases in fuel prices from
customers through fuel surcharges. Fuel surcharges that can be collected do not
always fully offset the increase in the cost of diesel fuel.

If the growth in our regional operations throughout the United States slows
or stagnates, or if we are unable to commit sufficient resources to our regional
operations, our results of operations could be adversely affected.

Currently, a significant portion of our business is concentrated in the
Arizona and California markets. A general economic decline or a natural disaster
in either of these markets could have a materially adverse effect on our growth
and profitability. If we are not able to continue our successful growth and
expansion into the Midwest, South Central, Southeastern and Southern regions,
and on the East Coast, our growth and profitability could be materially and
adversely affected by general economic declines or natural disasters in those
markets.

In addition to our regional facility in Phoenix, Arizona, we have
established regional operations in Salt Lake City, Utah; Portland, Oregon;
Denver, Colorado; Kansas City, Kansas; Katy, Texas; Indianapolis, Indiana;
Charlotte, North Carolina; Gulfport, Mississippi; Memphis, Tennessee; Atlanta,
Georgia; and Las Vegas, Nevada, in order to serve markets in these regions.
These regional operations require the commitment of additional revenue equipment
and personnel, as well as management resources, for future development. Should
the growth in our regional operations throughout the United States slow or
stagnate, the results of our operations could be adversely affected. We may
encounter operating conditions in these new markets that differ substantially
from those previously experienced in our western United States markets. There
can be no assurance that our regional operating strategy, as employed in the
western United States, can be duplicated successfully in the other areas of the
United States or that it will not take longer than expected or require a more
substantial financial commitment than anticipated.

30

Our operations are subject to various governmental regulations which limit
our business and the violation of which could result in substantial fines or
penalties.

The DOT and various state and local agencies exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, safety, and insurance requirements. The DOT adopted
revised hours-of-service regulations for drivers on April 28, 2003 that became
effective on January 4, 2004. The revised regulations could reduce the potential
or practical amount of time that drivers can spend driving, if we are unable to
limit their other on-duty activities. These changes could adversely affect our
profitability if shippers are unwilling to assist us in managing the drivers'
non-driving activities, such as loading, unloading, and waiting. If these
changes reduce our miles per truck or increase our costs and these effects are
not offset by higher rates or the collection of detention or other charges, our
operating results could be materially and adversely affected. Our company
drivers and independent contractors also must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing. We also may become subject to new or more restrictive regulations
relating to ergonomics or other matters. In addition to direct regulation by the
DOT and other agencies, our business also is subject to the effects of new
tractor engine design requirements implemented by the EPA such as those that
became effective October 1, 2002, and are expected to become effective in 2007
which are discussed above under "Factors That May Affect Future Results -
Increased prices for, or increased costs of operating, new revenue equipment and
decreases in the value of used revenue equipment may materially and adversely
affect our earnings and cash flow." Additional changes in the laws and
regulations governing or impacting our industry could affect the economics of
the industry by requiring changes in operating practices or by influencing the
demand for, and the costs of providing, services to shippers.

We are subject to various environmental laws and regulations dealing with
the handling of hazardous materials, underground fuel storage tanks and
discharge and retention of stormwater. We operate in industrial areas, where
truck terminals and other industrial facilities are located, and where
groundwater or other forms of environmental contamination have occurred. Our
operations involve the risks of fuel spillage or seepage, environmental damage,
and hazardous waste disposal, among others. Two of our terminal facilities are
located adjacent to environmental "superfund" sites. Although we have not been
named as a potentially responsible party in either case, we are potentially
exposed to claims that we may have contributed to environmental contamination in
the areas in which we operate. We also maintain bulk fuel storage and fuel
islands at several of our facilities.

If we are involved in a spill or other accident involving hazardous
substances, or if we are found to be in violation of applicable laws or
regulations, it could have a materially adverse effect on our business and
operating results. If we should fail to comply with applicable environmental
regulations, we could be subject to substantial fines or penalties and to civil
and criminal liability.

Difficulty in driver and independent contractor retention may have a
materially adverse affect on our business.

Difficulty in attracting or retaining qualified drivers, including
independent contractors could have a materially adverse effect on our growth and
profitability. Our independent contractors are responsible for paying for their
own equipment, fuel, and other operating costs, and significant increases in
these costs could cause them to seek higher compensation from us or seek other
opportunities within or outside the trucking industry. In addition, competition
for drivers, which is always intense, increased during the second half of 2003.
If a shortage of drivers should occur, or if we were unable to continue to
attract and contract with independent contractors, we could experience an
increase in the number of our tractors without drivers, which would lower our
profitability, or be required to adjust our driver compensation package, which
could adversely affect our profitability if not offset by a corresponding
increase in rates.

31

We are highly dependent on a few major customers, the loss of one or more
of which could have a materially adverse effect on our business.

A significant portion of our revenue is generated from a limited number of
major customers. For the year ended December 31, 2003, our top 25 customers,
based on revenue, accounted for approximately 49% of our revenue; our top 10
customers, approximately 29% of our revenue; and our top 5 customers,
approximately 18% of our revenue. Generally, we do not have long term
contractual relationships with our major customers, and we cannot assure you
that our customer relationships will continue as presently in effect. A
reduction in or termination of our services by one or more of our major
customers could have a materially adverse effect on our business and operating
results.

Terion trailer-tracking technology may not be available to us, which could
require us to incur the cost of replacement technology, and adversely affect our
trailer utilization and our ability to assess detention charges.

We utilize Terion's trailer-tracking technology to assist with monitoring
the majority of our trailers. Terion has emerged from a Chapter 11 bankruptcy
and a plan of reorganization has been approved by the Bankruptcy Court. If
Terion ceases operations or abandons that trailer-tracking technology, we would
be required to incur the cost of replacing that technology or could be forced to
operate without this technology, which could adversely affect our trailer
utilization and our ability to assess detention charges.

Our investment in Concentrek may not be successful and we may be forced to
write off part or all of our investment.

In April 1999, we invested approximately $200,000 to acquire a 17% minority
interest in Concentrek, Inc. ("Concentrek"), a transportation logistics company,
the remainder of which is owned by members of the Knight family and Concentrek's
management. We also have loaned funds to Concentrek on a secured basis to fund a
portion of its start-up costs. At December 31, 2003, the outstanding amount of
these loans was approximately $2.0 million. If Concentrek's financial position
does not continue to improve, and if it is unable to raise additional capital,
we could be forced to write down all or part of our investment.

We may not be successful in our acquisition strategy, which could limit our
growth prospects.

We may grow by acquiring other trucking companies or trucking assets.
Acquisitions could involve the dilutive issuance of equity securities and/or our
incurring additional debt. In addition, acquisitions involve numerous risks,
including: difficulties in assimilating the acquired company's operations; the
diversion of our management's attention from other business concerns; the risks
of entering into markets in which we have had no or only limited direct
experience; and the potential loss of customers, key employees and drivers of
the acquired company, all of which could have a materially adverse effect on our
business and operating results. If we were to make acquisitions in the future,
we cannot assure you that we will be able to successfully integrate the acquired
companies or assets into our business.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risk changes in interest rate on debt and from
changes in commodity prices.

Under Financial Accounting Reporting Release Number 48 and Securities and
Exchange Commission rules and regulations, we are required to disclose
information concerning market risk with

32

respect to foreign exchange rates, interest rates, and commodity prices. We have
elected to make such disclosures, to the extent applicable, using a sensitivity
analysis approach, based on hypothetical changes in interest rates and commodity
prices.

Except as described below, we have not had occasion to use derivative
financial instruments for risk management purposes and do not use them for
either speculation or tracking. Because our operations are confined to the
United States, we are not subject to foreign currency risk.

Interest Rate Risk

We are subject to interest rate risk to the extent the Company borrows
against its line of credit or incurs debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. In the opinion of management, an increase in short-term interest
rates could have a materially adverse effect on our financial condition if our
debt levels increase and if the interest rate increases are not offset by
freight rate increases or other items. Management does not foresee or expect in
the near future any significant changes in our exposure to interest rate
fluctuations or in how that exposure is managed by us. We have not issued
corporate debt instruments.

Commodity Price Risk

We are also subject to commodity price risk with respect to purchases of
fuel. Prices and availability of petroleum products are subject to political,
economic and market factors that are generally outside our control. Because our
operations are dependent upon diesel fuel, significant increases in diesel fuel
costs could materially and adversely affect our results of operations and
financial condition if we are unable to pass increased costs on to customers
through rate increases or fuel surcharges. Historically, we have sought to
recover a portion of our short-term fuel price increases from customers through
fuel surcharges. Fuel surcharges that can be collected do not always fully
offset an increase in the cost of diesel fuel. For the fiscal year ended
December 31, 2003, fuel expense, net of fuel surcharge, represented 16.2% of our
total operating expenses, net of fuel surcharge, compared to 16.4% for the same
period ending in 2002.

We are party to three fuel hedging contracts relating to the price of
heating oil on the New York Mercantile Exchange ("NYMX") that we entered into
between October 2000 and February 2002 in connection with volume diesel fuel
purchases. If the price of heating oil on the NYMX falls below $0.58 per gallon
we may be required to pay the difference between $0.58 and the index price (1)
for 1.0 million gallons per month for any selected twelve months through March
31, 2005, and (2) for 750,000 gallons per month for the twelve months of 2005.
At February 6, 2004, the price of heating oil on the NYMX was $0.86 for March
2004 contracts. For each $0.05 per gallon the price of heating oil would fall
below $0.58 per gallon during the relevant periods, our potential loss on the
hedging contracts would be approximately $1.0 million. However, our net savings
on fuel costs resulting from lower fuel prices under our volume diesel fuel
purchase contracts would be approximately $1.0 million, after taking the loss on
the hedging contracts into consideration. We have valued these items at fair
value in the accompanying December 31, 2003, consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

The consolidated balance sheets of Knight Transportation, Inc. and
Subsidiaries, as of December 31, 2003 and 2002, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2003, together
with the related notes, the report of KPMG LLP, independent public accountants
for the years ended December 31, 2003 and 2002, respectively, and the report of
Arthur Andersen LLP, independent public accountants for the year ended December
31, 2001, are set forth at pages F-1 through F-21, below.

33

Item 9. Changes in and Disagreements on Accounting and Financial Disclosure

Not Applicable.

Item 9A. Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, the Company has carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. During the Company's fourth fiscal quarter, there were no changes
in the Company's internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.

The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.

34



PART III

Item 10. Directors and Executive Officers of the Company

We incorporate by reference the information contained under the headings
"Proposal No. 1 - Election of Class III Directors," "Continuing Directors,"
"Corporate Governance - Executive Officers of the Company," "Corporate
Governance - The Board of Directors and Its Committees - Committees of the Board
of Directors - Audit Committee," "Corporate Governance -Compliance with Section
16(a) of the Exchange Act," and "Corporate Governance - Code of Ethics," from
our definitive Proxy Statement to be delivered to our in connection with the
2004 Annual Meeting of Shareholders to be held May 21, 2004.

Item 11. Executive Compensation

We incorporate by reference the information contained under the headings
"Executive Compensation" and "Corporate Governance - Director Compensation" from
our definitive Proxy Statement to be delivered to our shareholders in connection
with the 2004 Annual Meeting of Shareholders to be held May 21, 2004; provided,
however, that the Compensation Committee Report on Executive Compensation that
appears under the heading "Executive Compensation" in such Proxy Statement is
not incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides certain information, as of December 31, 2003,
with respect our compensation plans and other arrangements under which shares of
our Common Stock are authorized for issuance.


Equity Compensation Plan Information

Number of securities
remaining eligible
Number of securities for future issuance
to be issued upon Weighted average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options (excluding securities
warrants and rights warrants and rights reflected
in column (a))
Plan category (a) (b) (c)
- --------------------------------------------- ---------------------- ----------------------- ------------------------
Equity compensation plans
approved by security holders 1,626,785 $13.02 683,600

Equity compensation plans not
approved by security holders 0 0 0
---------------------- ----------------------- ------------------------
Total 1,626,785 $13.02 683,600
====================== ======================= ========================


We incorporate by reference the information contained under the heading
"Security Ownership of Certain Beneficial Owners and Management" from our
definitive Proxy Statement to be delivered to our shareholders in connection
with the 2004 Annual Meeting of Shareholders to be held May 21, 2004.

35


Item 13. Certain Relationships and Related Transactions

We incorporate by reference the information contained under the headings
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" from our
definitive Proxy Statement to be delivered to our shareholders in connection
with the 2004 Annual Meeting of Shareholders to be held May 21, 2004.

Item 14. Principal Accounting Fees and Services

We incorporate by reference the information contained under the heading
"Principal Accounting Fees and Services" from our definitive Proxy Statement to
be delivered to our shareholders in connection with the 2004 Annual Meeting of
Shareholders to be held May 21, 2004.

36



PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report on Form 10-K at
pages F-1 through F-21, below.

1. Consolidated Financial Statements:

Knight Transportation, Inc. and Subsidiaries
Report of KPMG LLP, Independent Public Accountants
Report of Arthur Andersen, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements

2. Consolidated Financial Statement Schedules required to be filed by
Item 8 and Paragraph (d) of Item 14:

Valuation and Qualifying Accounts and Reserves

Schedules not listed have been omitted because of the absence of conditions
under which they are required or because the required material information is
included in the Consolidated Financial Statements or Notes to the Consolidated
Financial Statements included herein.

3. Exhibits:

The Exhibits required by Item 601 of Regulation S-K are listed at paragraph
(c), below, and at the Exhibit Index appearing at the end of this report.

(b) Reports on Form 8-K:

During the fourth quarter ended December 31, 2003, the Company filed with,
or furnished to, the Securities and Exchange Commission the following Current
Report on Form 8-K:

Current Report on Form 8-K dated October 15, 2003 (furnished to the
Commission on October 16, 2003) regarding the issuance of a press release
to report the Company's financial results for the quarter and nine months
ended September 30, 2003.

37



(c) Exhibits:

The following exhibits are filed with this Form 10-K or incorporated herein
by reference to the document set forth next to the exhibit listed below:



Exhibit
Number Descriptions
- ------- ------------

3.1 Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 No. 33-83534.)

3.1.1 First Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.1 to the Company's Report on Form
10-K for the period ending December 31, 2000.)

3.1.2 Second Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.2 to the Company's Registration
Statement on Form S-3 No. 333-72130.)

3.1.3 Third Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.3 to the Company's Report on Form
10-K for the period ending December 31, 2002.)

3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-3 No. 333-72130.)

3.2.1 First Amendment to Restated Bylaws of the Company. (Incorporated by
reference to Exhibit 3.2.1 to the Company's Report on Form 10-K for the
period ending December 31, 2002.)

4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the
Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form
10-K.)

4.2 Sections 2 and 5 of the Restated Bylaws of the Company. (Incorporated by
reference to Exhibit 3.2 to this Report on Form 10-K.)

10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of
March 1, 1994, between Randy Knight, the Company, and Lawyers Title of
Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-83534.)

10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow
Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No.
3 to the Company's Registration Statement on Form S-1 No. 33-83534.)

10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 No. 33-83534.)

10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company
dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 No. 33-83534.)


38



10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between
L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight
Transportation, Inc. and certain other parties dated March 11, 1994
(assigning the lessor's interest to the R. K. Trust). (Incorporated by
reference to Exhibit 10.2.1 to the Company's Report on Form 10-K for the
period ending December 31, 1997.)

10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy
Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight
Transportation, Inc., dated as of September 1, 1997. (Incorporated by
reference to Exhibit 10.2.2 to the Company's Report on Form 10-K for the
period ending December 31, 1997.)

10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash)
dated as of October 1994, between the Company and Knight Deer Valley,
L.L.C., an Arizona limited liability company. (Incorporated by reference to
Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 No. 33-83534.)

10.4 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated
as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the
Company's Notice and Information Statement on Schedule 14(c) for the period
ending December 31, 1997.)

10.5 Amended Indemnification Agreements between the Company, Don Bliss, Clark A.
Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D.
Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997.
(Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-K for the period ending December 31, 1996).

10.5.1 Indemnification Agreements between the Company and Timothy M. Kohl and
Matt Salmon, dated as of October 16, 2000, and May 9, 2001, respectively.
(Incorporated by reference to Exhibit 10.6.1 to the Company's Report on
Form 10-K for the period ending December 31, 2001.)

10.5.2* Indemnification Agreements between the Company and Mark Scudder and
Michael Garnreiter, dated as of November 10, 1999, and September 19, 2003,
respectively.

10.6 Master Equipment Lease Agreement dated as of January 1, 1996, between the
Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7
to the Company's Report on Form 10-K for the period ended December 31,
1995.)

10.7 Purchase Agreement and Escrow Instructions dated as of July 13, 1995,
between the Company, Swift Transportation Co., Inc. and United Title Agency
of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's
Report on Form 10-K for the period ended December 31, 1995.)

10.7.1 First Amendment to Purchase Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.8.1 to the Company's Report on
Form 10-K for the period ended December 31, 1995.)

10.8 Purchase and Sale Agreement dated as of February 13, 1996, between the
Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit
10.9 to the Company's Report on Form 10-K for the period ended December 31,
1995.)

10.9 Asset Purchase Agreement dated March 13, 1999, by and among Knight
Transportation, Inc., Knight Acquisition Corporation, Action Delivery
Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis.
(Incorporated by reference to Exhibit 2.1 to the


39



Company's Report on Form 8-K filed with the Securities and Exchange
Commission on March 25, 1999.)

10.10 Master Equipment Lease Agreement dated as of October 28, 1998, between
Knight Transportation Midwest, Inc., formerly known as "Knight
Transportation Indianapolis, Inc." and Quad-K Leasing, Inc. (Incorporated
by reference to Exhibit 10.11 to the Company's Report on Form 10-K for the
period ending December 31, 1999.)

10.11 Consulting Agreement dated as of March 1, 2000 between Knight
Transportation, Inc. and LRK Management, L.L.C. (Incorporated by reference
to Exhibit 10.12 to the Company's Report on Form 10-K for the period ending
December 31, 1999.)

10.12 Stock Purchase Agreement dated April 19, 2000 by and among Knight
Transportation, Inc., as Buyer, John R. Fayard, Jr., and John Fayard Fast
Freight, Inc. (Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on May 4, 2000.)

10.13 Credit Agreement by and among Knight Transportation, Inc., Wells Fargo
Bank and Northern Trust Bank, dated April 6, 2001. (Incorporated by
reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the
period ending June 30, 2001.)

10.13.1 Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated February 13, 2003.
(Incorporated by reference to Exhibit 10.14.1 to the Company's Report on
Form 10-K for the period ending December 31, 2002.)

10.13.2* Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated September 15, 2003.

10.13.3* Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated December 15, 2003.

10.14 Knight Transportation, Inc. 2003 Stock Option Plan. (Incorporated by
reference to Exhibit 1 to the Company's Definitive Proxy Statement on
Schedule 14A relating to its Annual Meeting of Shareholders held on May 21,
2003.)

21.1* Subsidiaries of the Company.

23.1* Consent of KPMG LLP.

31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Kevin P.
Knight, the Company's Chief Executive Officer.

31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David A.
Jackson, the Company's Chief Financial Officer.

32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Kevin P. Knight, the
Company's Chief Executive Officer.


40



32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Jackson, the
Company's Chief Financial Officer.

- ------------------
* Filed herewith.

41


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

KNIGHT TRANSPORTATION, INC.

By: /s/ Kevin P. Knight
-----------------------------------------------
Kevin P. Knight
Date: February 24, 2004 Chief Executive Officer, in his capacity as such
and on behalf of the registrant

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


Signature and Title Date
------------------- ----

/s/ Kevin P. Knight February 24, 2004
- -------------------------------------------------
Kevin P. Knight, Chairman of the Board,
Chief Executive Officer, Director

/s/ Gary J. Knight February 24, 2004
- -------------------------------------------------
Gary J. Knight, Vice Chairman, Director

/s/ Timothy M. Kohl February 24, 2004
- -------------------------------------------------
Timothy M. Kohl, President, Secretary, Director

/s/ Keith T. Knight February 24, 2004
- -------------------------------------------------
Keith T. Knight, Executive Vice President, Director

/s/ David A. Jackson February 24, 2004
- -------------------------------------------------
David A. Jackson, Chief Financial Officer

/s/ Robert L. Johnson February 24, 2004
- -------------------------------------------------
Robert L. Johnson, Corporate Controller

/s/ Randy Knight February 24, 2004
- -------------------------------------------------
Randy Knight, Director

/s/ Mark Scudder February 24, 2004
- -------------------------------------------------
Mark Scudder, Director

/s/ Donald A. Bliss February 24, 2004
- -------------------------------------------------
Donald A. Bliss, Director

/s/ G. D. Madden February 24, 2004
- -------------------------------------------------
G.D. Madden, Director

/s/ Matt Salmon February 24, 2004
- -------------------------------------------------
Matt Salmon, Director

/s/ Michael Garnreiter February 24, 2004
- -------------------------------------------------
Michael Garnreiter, Director




INDEPENDENT AUDITORS' REPORT

The Board of Directors
Knight Transportation, Inc.:

We have audited the accompanying consolidated balance sheets of Knight
Transportation, Inc. and subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for the years then ended. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement Schedule II for the years ended December 31, 2003 and
2002. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits. The consolidated financial statements
and financial statement schedule of Knight Transportation, Inc. and subsidiaries
as of December 31, 2001 and for the year then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those consolidated financial statements and financial statement
schedule in their report dated January 16, 2002.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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 Knight
Transportation, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement Schedule II for
the years ended December 31, 2003 and 2002, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

As discussed above, the consolidated financial statements of Knight
Transportation, Inc. and subsidiaries as of December 31, 2001 and for the year
then ended were audited by other auditors who have ceased operations. As
described in Note 1, these consolidated financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was
adopted by the Company as of January 1, 2002. In our opinion, the disclosures
for 2001 in Note 1 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 consolidated financial statements of
Knight Transportation, Inc. and subsidiaries other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.

/s/ KPMG LLP

Phoenix, Arizona
January 21, 2004

F-1

THE REPORT PRESENTED BELOW IS A COPY OF THE INDEPENDENT AUDITORS' REPORT OF
ARTHUR ANDERSEN LLP, THE FORMER AUDITOR FOR KNIGHT TRANSPORTATION, INC. ISSUED
ON JANUARY 16, 2002. ARTHUR ANDERSEN LLP HAS BEEN UNABLE TO ISSUE AN UPDATED
REPORT. ADDITIONALLY, THE OPINION PRESENTED BELOW COVERS THE BALANCE SHEET AS OF
DECEMBER 31, 2000 AND THE STATEMENTS OF INCOME, COMPREHENSIVE INCOME,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, WHICH
STATEMENTS ARE NOT INCLUDED IN THIS REPORT ON FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Knight Transportation, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of KNIGHT
TRANSPORTATION, INC. (an Arizona corporation) AND SUBSIDIARIES (the Company) as
of December 31, 2001 and 2000, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2001. 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.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

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 of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Phoenix, Arizona
January 16, 2002

F-2




KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2003 and 2002
(In thousands)



2003 2002
---------------- ---------------
Assets

Current Assets:
Cash and cash equivalents $ 40,550 $ 36,198
Trade receivables, net of allowance for doubtful accounts of
$1,942 and $1,325, respectively 38,751 40,356
Notes receivable, net of allowance for doubtful notes receivable
of $137 and $142, respectively 515 956
Inventories and supplies 1,336 1,345
Prepaid expenses 7,490 9,653
Income tax receivable 1,761 1,004
Deferred tax assets 5,667 3,428
---------------- ---------------
96,070 92,940
---------------- ---------------
Property and Equipment:
Land and land improvements 13,911 14,158
Buildings and improvements 17,166 12,898
Furniture and fixtures 4,916 6,134
Shop and service equipment 2,409 1,975
Revenue equipment 256,803 211,184
Leasehold improvements 968 1,049
---------------- ---------------
296,173 247,398
Less: accumulated depreciation and amortization (83,238) (70,505)
---------------- ---------------

Property and Equipment, net 212,935 176,893
---------------- ---------------
Notes Receivable, net of current portion 362 1,487
---------------- ---------------

Other Assets 11,859 13,524
---------------- ---------------
$ 321,226 $ 284,844
================ ===============



The accompanying notes are an integral part of these consolidated financial
statements.

F-3




KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2003 and 2002
(In thousands, except par value)



2003 2002
---------------- ---------------

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable $ 3,408 $ 7,749
Accrued payroll 3,448 3,571
Accrued liabilities 4,493 4,231
Current portion of long-term debt - 2,715
Claims accrual 14,805 10,419
---------------- ---------------
26,154 28,685

Line of Credit - 12,200
Deferred Tax Liabilities 55,149 44,302
---------------- ---------------
81,303 85,187
---------------- ---------------
Commitments and Contingencies (Note 4)

Shareholders' Equity:
Preferred stock, $0.01 par value; 50,000 shares authorized;
none issued - -
Common stock, $0.01 par value; 100,000 shares authorized;
37,489 and 37,145 shares issued and outstanding at
December 31, 2003 and 2002, respectively 375 371
Additional paid-in capital 77,942 73,521
Accumulated other comprehensive loss - (383)
Retained earnings 161,606 126,148
---------------- ---------------
239,923 199,657
---------------- ---------------
$ 321,226 $ 284,844
================ ===============



The accompanying notes are an integral part of these consolidated financial
statements.

F-4


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Statements of Income
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)



2003 2002 2001
-------------- -------------- --------------

Revenue:
Revenue, before fuel surcharge $ 326,856 $ 279,360 $ 241,679
Fuel surcharge 13,213 6,430 9,139
-------------- -------------- --------------
Total revenue 340,069 285,790 250,818
-------------- -------------- --------------

Operating Expenses:
Salaries, wages and benefits 104,756 93,596 81,779
Fuel 56,573 44,389 38,934
Operations and maintenance 20,345 17,150 13,892
Insurance and claims 16,558 12,377 10,230
Operating taxes and licenses 9,148 7,383 7,038
Communications 3,002 2,407 2,057
Depreciation and amortization 30,066 22,887 18,417
Lease expense - revenue equipment 7,635 9,370 8,511
Purchased transportation 25,194 21,797 23,495
Miscellaneous operating expenses 7,343 6,940 6,913
-------------- -------------- --------------
280,620 238,296 211,266
-------------- -------------- --------------
Income from operations 59,449 47,494 39,552
-------------- -------------- --------------

Other Income (Expense):
Interest income 560 935 708
Interest expense (881) (1,084) (2,514)
Other expense (330) - (5,679)
-------------- -------------- ---------------
(651) (149) (7,485)
--------------- -------------- --------------
Income before income taxes 58,798 47,345 32,067
Income Taxes (23,340) (19,410) (13,050)
-------------- -------------- --------------
Net income $ 35,458 $ 27,935 $ 19,017
============== ============== ==============

Basic Earnings Per Share $ 0.95 $ 0.75 $ 0.55
============== ============== ==============

Diluted Earnings Per Share $ 0.93 $ 0.73 $ 0.54
============== ============== ==============

Weighted Average Shares
Outstanding - Basic 37,343 37,012 34,275
============== ============== ==============

Weighted Average Shares
Outstanding - Diluted 38,238 38,029 35,145
============== ============== ==============


The accompanying notes are an integral part of these consolidated financial
statements.

F-5


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands)



2003 2002 2001
------------- ------------- -------------

Net Income $ 35,458 $ 27,935 $ 19,017

Other Comprehensive Income (Loss):
Interest rate swap agreement, fair market value adjustment 383 349 (732)
------------- ------------- -------------
Comprehensive Income $ 35,841 $ 28,284 $ 18,285
============= ============= =============



The accompanying notes are an integral part of these consolidated financial
statements.

F-6



KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)




Accumulated
Common Stock Additional Other
--------------------------------- Paid-in Comprehensive Retained
Shares Issued Amount Capital Income Earnings Total
---------------- ------------- --------------- ---------------- ------------ ----------

Balance, December 31, 2000 33,732 $ 337 $ 25,587 $ - $ 79,196 $ 105,120
Exercise of stock options 422 4 1,994 - - 1,998
Issuance of shares in
stock offering, net of
offering costs of $2,517 2,679 27 41,203 - - 41,230
Issuance of common stock 1 - 15 - - 15
Tax benefit on stock
option exercises - - 1,048 - - 1,048
Fair value adjustment of
interest rate swap - - - (732) - (732)
Net income - - - - 19,017 19,017
---------------- ------------- --------------- ---------------- ------------ ----------
Balance, December 31, 2001 36,834 368 69,847 (732) 98,213 167,696
Exercise of stock options 310 3 2,021 - - 2,024
Issuance of common stock 1 - 15 - - 15
Tax benefit on stock
option exercises - - 1,638 - - 1,638
Fair value adjustment of
interest rate swap - - - 349 - 349
Net income - - - - 27,935 27,935
---------------- ------------- --------------- ---------------- ------------ ----------
Balance, December 31, 2002 37,145 371 73,521 (383) 126,148 199,657
Exercise of stock options 343 4 2,219 - - 2,223
Issuance of common stock 1 - 23 - - 23
Tax benefit on stock
option exercises - - 2,179 - - 2,179
Fair value adjustment of
interest rate swap - - - 383 - 383
Net income - - - - 35,458 35,458
---------------- ------------- --------------- ---------------- ------------ ----------

Balance, December 31, 2003 37,489 $ 375 $ 77,942 $ - $ 161,606 $ 239,923
================ ============= =============== ================ ============ ==========


The accompanying notes are an integral part of these consolidated financial
statements.

F-7


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)


2003 2002 2001
------------- ------------- -------------
Cash Flows From Operating Activities:
Net income $ 35,458 $ 27,935 $ 19,017
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 30,066 22,887 18,417
Write-off of investment 330 - 5,679
Non-cash compensation expense for issuance of
common stock to certain members of board of directors 23 15 15
Provision for allowance for doubtful accounts and
notes receivable 811 613 470
Deferred income taxes 8,608 9,280 3,225
Interest rate swap agreement - fair value change 383 349 -
Tax benefit on stock option exercises 2,179 1,638 1,048
Changes in assets and liabilities:
Decrease (increase) in trade receivables 804 (9,200) 1,775
Decrease (increase) in inventories and supplies 9 561 (1,113)
Decrease (increase) in prepaid expenses 2,163 (1,689) (2,946)
(Increase) decrease in income tax receivable (757) (361) 562
(Increase) decrease in other assets (54) 75 (272)
(Decrease) in accounts payable (141) (363) (2,287)
Increase in accrued liabilities and claims accrual 4,525 3,747 2,576
------------- ------------- -------------
Net cash provided by operating activities 84,407 55,487 46,166
------------- ------------- --------------

Cash Flows From Investing Activities:
Purchases of property and equipment, net (70,308) (41,811) (30,378)
Investment in/advances from (to) other companies 1,389 (1,845) (1,334)
Decrease (increase) in notes receivable 1,556 1,366 (2,357)
------------- ------------- -------------
Net cash used in investing activities (67,363) (42,290) (34,069)
------------- ------------- -------------

Cash Flows From Financing Activities:
Payments on line of credit, net (12,200) - (21,800)
Payments of long-term debt (2,715) (3,159) (14,489)
Payments of accounts payable - equipment - - (1,051)
Proceeds from issuance of common stock - - 43,747
Payment of stock offering costs - - (2,517)
Proceeds from exercise of stock options 2,223 2,024 1,998
------------- ------------- -------------
Net cash (used in) provided by
financing activities (12,692) (1,135) 5,888
-------------- -------------- -------------
Net Increase in Cash and Cash Equivalents 4,352 12,062 17,985
Cash and Cash Equivalents, beginning of year 36,198 24,136 6,151
------------- ------------- -------------
Cash and Cash Equivalents, end of year $ 40,550 $ 36,198 $ 24,136
============= ============= =============

Supplemental Disclosures:
Noncash investing and financing transactions:
Equipment acquired included in accounts payable $ 74 $ 4,274 $ -

Cash flow information:
Income taxes paid $ 13,334 $ 8,581 $ 7,482
Interest paid 474 996 2,489



The accompanying notes are an integral part of these consolidated financial
statements.

F-8


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001




1. Organization and Summary of Significant Accounting Policies

a. Nature of Business

Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the
Company) is a short to medium-haul, truckload carrier of general
commodities. The operations are based in Phoenix, Arizona, where the
Company has its corporate offices, fuel island, truck terminal, dispatching
and maintenance services. The Company also has operations in Katy, Texas;
Indianapolis, Indiana; Charlotte, North Carolina; Salt Lake City, Utah;
Gulfport, Mississippi; Kansas City, Kansas; Portland, Oregon; Memphis,
Tennessee; Atlanta, Georgia; and Denver, Colorado. The Company operates in
one industry, road transportation, which is subject to regulation by the
Department of Transportation and various state regulatory authorities. The
Company has an owner-operator program. Owner-operators are independent
contractors who provide their own tractors. The Company views
owner-operators as an alternative method to obtaining additional revenue
equipment.

b. Significant Accounting Policies

Principles of Consolidation - The accompanying consolidated financial
statements include the parent company Knight Transportation, Inc., and its
wholly owned subsidiaries (the Company). All material intercompany items
and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash Equivalents - The Company considers all highly liquid instruments
purchased with original maturities of three months or less to be cash
equivalents.

Notes Receivable - Included in notes receivable are amounts due from
independent contractors under a program whereby the Company finances
tractor purchases for its independent contractors. These notes receivable
are collateralized by revenue equipment and are due in monthly
installments, including principal and interest at 10%, over periods
generally ranging from three to five years.

Inventories and Supplies - Inventories and supplies consist primarily of
tires and spare parts which are stated at the lower of cost, using the
first-in, first-out (FIFO) method, or net realizable value.

F-9





Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization on property and equipment is calculated by
the straight-line method over the following estimated useful lives:

Years
-----

Land improvements 5
Buildings and improvements 20-30
Furniture and fixtures 5
Shop and service equipment 5-10
Revenue equipment 5-10
Leasehold improvements 10

The Company expenses repairs and maintenance as incurred. For the years
ended December 31, 2003, 2002, and 2001, repairs and maintenance expense
totaled approximately $12.3 million, $9.8 million and $8.9 million,
respectively, and is included in operations and maintenance expense in the
accompanying consolidated statements of income.

Revenue equipment is depreciated to salvage values of 15% to 30% for all
tractors. Trailers are depreciated to salvage values of 10% to 40%. The
Company periodically reviews and adjusts its estimates related to useful
lives and salvage values for revenue equipment.

Tires on revenue equipment purchased are capitalized as a part of the
equipment cost and depreciated over the life of the vehicle. Replacement
tires and recapping costs are expensed when placed in service.

Other Assets - Other assets include:



2003 2002
------------- -------------
(In thousands) (In thousands)

Investment in and related advances to Concentrek, Inc. $ 2,245 $ 3,620
Investment in Knight Flight, LLC 1,388 1,718
Goodwill 8,434 8,434
Other 722 682
Accumulated amortization (930) (930)
------------- -------------
$ 11,859 $ 13,524
============= =============


In April 1999, the Company acquired a 17% interest in Concentrek, Inc.
("Concentrek") through the purchase of shares of Concentrek's Class A
Preferred Stock for $200,000. The remaining 83% interest in Concentrek is
owned by Randy, Kevin, Gary and Keith Knight and members of Concentrek's
management. The Company has made loans to Concentrek to fund start-up
costs. At December 31, 2003, the total outstanding amount of these loans
was approximately $2.0 million. Of the total loan amounts, $824,500 is
evidenced by a promissory note that is convertible into Concentrek's Class
A Preferred Stock, and $1.2 million is evidenced by a promissory note which
is personally guaranteed by Randy, Kevin, Gary and Keith Knight. Both loans
are secured by a lien on Concentrek's assets. These loans are on parity
with respect to their security. This investment is recorded at cost and the
Company's ownership percentage in this investment was less than 20% at
December 31, 2003 and 2002 and the Company does not have significant
influence over the operating decisions of that entity. See Note 6.

In 1998 and 1999, the Company invested in a communications technology
company. The Company owned less than four percent of that technology
company and did not derive any revenue from its investment. In August 2001,
the investee announced changes to its strategic operations which caused the
Company to evaluate the investment for impairment. During 2001, the Company
elected to write-off this investment in accordance with its policy on
evaluating the impairment of long-lived assets. The investee, subsequent to
the Company writing-off the investment, filed for bankruptcy protection.
This $5.7 million charge is reflected in other expense for the year-ended
December 31, 2001, in the accompanying consolidated financial statements.

F-10

In November 2000, the Company acquired a 19% interest in Knight Flight
Services, LLC ("Knight Flight") which purchased and operates a Cessna
Citation 560 XL jet aircraft. The aircraft is leased to Pinnacle Air
Charter, L.L.C., an unaffiliated entity, which leases the aircraft on
behalf of Knight Flight. The cost of the aircraft to Knight Flight was $8.9
million. The Company originally invested $1.7 million in Knight Flight to
obtain a 19% interest in order to assure access to charter air travel for
the Company's employees. During 2003 the Company recorded a $330,000
reduction in the carrying value of this investment to more closely reflect
the fair value of the primary asset of that entity. The Company has no
further financial commitments to Knight Flight. The remaining 81% interest
in Knight Flight is owned by Randy, Kevin, Gary and Keith Knight, who have
personally guaranteed the balance of the debt incurred to finance the
purchase of the aircraft, and have agreed to contribute any capital
required to meet any cash short falls. The Company has a priority use right
for the aircraft. This investment is accounted for on the equity method.
According to terms under an operating agreement with Knight Flight, losses
are first allocated to those members with the 81% ownership interest. Since
Knight Flight has incurred losses to date, no adjustment has been made to
the investment under the equity method of accounting, except for the
impairment charge noted above. All operating losses to date have been
allocated to the 81% members pursuant to the operating agreement. See Note
6.

Impairment of Long-Lived Assets - Statement of Financial Accounting
Standards ("SFAS") No. 144 provides a single accounting model for
long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.
The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 did not affect the Company's financial statements. Prior to the
adoption of SFAS No. 144, the Company accounted for long-lived assets in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."

In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
balance sheet.

Recoverability of long-lived assets is dependent upon, among other things,
the Company's ability to continue to achieve profitability, in order to
meet its obligations when they become due. In the opinion of management,
based upon current information, the carrying amount of long-lived assets
will be recovered by future cash flows generated through the use of such
assets over respective estimated useful lives.

Revenue Recognition - The Company recognizes revenues when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable and collectibility is probable. These conditions are met
upon delivery.

Income Taxes - The Company uses the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.

Stock-Based Compensation - At December 31, 2003, the Company has one
stock-based employee compensation plan, which is described more fully in
Note 8. The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise

F-11

price. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of the
grant. SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS
No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method had
been applied to all outstanding awards for the years ended December 31 (in
thousands, except per share data):



2003 2002 2001
---- ---- ----

Net income, as reported $ 35,458 27,935 19,017
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (1,018) (682) 134
------ ------ ------

Pro forma net income $ 34,440 27,253 19,151

Diluted earnings per share - as reported $ 0.93 0.73 0.54
Diluted earnings per share - pro forma $ 0.90 0.72 0.54


Financial Instruments - The Company's financial instruments include cash
equivalents, trade receivables, notes receivable, accounts payable and
notes payable. Due to the short-term nature of cash equivalents, trade
receivables and accounts payable, the fair value of these instruments
approximates their recorded value. In the opinion of management, based upon
current information, the fair value of notes receivable and notes payable
approximates market value. The Company does not have material financial
instruments with off-balance sheet risk, with the exception of operating
leases. See Note 4.

Concentration of Credit Risk - Financial instruments that potentially
subject the Company to credit risk consist principally of trade receivables
and notes receivable. The Company's three largest customers for each of the
years 2003, 2002 and 2001, aggregated approximately 11% of revenues.
Revenue from the Company's single largest customer represented
approximately 4% of revenues for each of the years 2003, 2002, and 2001.

Recapitalization and Stock Split - On May 9, 2001 the Board of Directors
approved a three-for-two stock split, effected in the form of a 50 percent
stock dividend. The stock split occurred on June 1, 2001, to all
shareholders of record as of the close of business on May 18, 2001. Also on
December 7, 2001 the Company's Board of Directors approved another
three-for-two stock split, effected in the form of a 50 percent stock
dividend. The stock split occurred on December 28, 2001, to all
stockholders of record as of the close of business on December 7, 2001.
These stock splits have been given retroactive recognition for all periods
presented in the accompanying consolidated financial statements. All share
amounts and earnings per share amounts have been retroactively adjusted to
reflect the stock splits.

F-12





Earnings Per Share - A reconciliation of the numerator (net income) and
denominator (weighted average number of shares outstanding) of the basic
and diluted EPS computations for 2003, 2002, and 2001, are as follows (In
thousands, except per share data):



2003 2002 2001
------------------------------------ ------------------------------------ ------------------------------------
Net Income Shares Per Share Net Income Shares Per Share Net Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------

Basic EPS $ 35,458 37,343 $ .95 $ 27,935 37,012 $ .75 $ 19,017 34,275 $ .55
========= ========= =========

Effect of stock
options - 895 - 1,017 - 870
----------- ------------ ----------- ------------ ----------- ------------

Diluted EPS $ 35,458 38,238 $ .93 $ 27,935 38,029 $ .73 $ 19,017 35,145 $ .54
=========== ============ ========= =========== ============ ========= =========== ============ =========


Segment Information - Although the Company has fifteen operating divisions,
it has determined that it has one reportable segment. Fourteen of the
divisions are managed based on the regions of the United States in which
each operates. Each of these divisions have similar economic
characteristics as they all provide short to medium haul truckload carrier
service of general commodities to a similar class of customers. In
addition, each division exhibits similar financial performance, including
average revenue per mile and operating ratio. The remaining division is not
reported because it does not meet the materiality thresholds in SFAS No.
131 "Disclosures about Segments of an Enterprise". As a result, the Company
has determined that it is appropriate to aggregate its operating divisions
into one reportable segment consistent with the guidance in SFAS No. 131.
Accordingly, the Company has not presented separate financial information
for each of its operating divisions as the Company's consolidated financial
statements present its one reportable segment.

Derivative and Hedging information - On January 1, 2001, the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, " Accounting for Certain
Derivative Instruments and Hedging Activities." This statement, as amended,
requires that all derivative instruments be recorded on the balance sheet
at their respective fair values.

All derivatives are recognized on the balance sheet at their fair value. On
the date the derivative contract is entered into, we designate the
derivative as either a hedge of the fair value of a recognized asset or
liability or of firm commitment ("fair value" hedge), a hedge of a
forecasted transaction or the variability of cash flows to be received or
paid related to a recognized asset or liability ("cash flow" hedge), a
foreign-currency fair-value or cash-flow hedge ("foreign currency" hedge),
or a hedge of a net investment in a foreign operation. The Company formally
assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are effective in
offsetting changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not effective as a hedge or that it has
ceased to be an effective hedge, the Company discontinues hedge accounting
prospectively.

The Company is party to three contracts relating to the price of heating
oil on the New York Merchantile Exchange ("NYMX") that were entered into in
connection with volume diesel fuel purchases between October 2000 and
February 2002. If the price of heating oil on the NYMX falls below $0.58
per gallon the Company may be required to pay the difference between $0.58
and the index price (1) for 1.0 million gallons per month for any selected
twelve months through March 31, 2005, and (2) for 750,000 gallons per month
for the twelve months of 2005.

Recently Adopted and to be Adopted Accounting Pronouncements -- In June
2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of
certain costs related to terminating a contract that is not a capital
lease, recognition of costs to consolidate facilities or relocate employees
and recognition of costs for termination of benefits provided to employees
that are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred

F-13


compensation contract. SFAS No. 146 applies to exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. This interpretation also clarifies that a guarantor is
required to recognize at the inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of this interpretation apply to guarantees issued or
modified after December 31, 2002. The disclosure requirements apply to
financial statements for interim and annual periods ending after December
31, 2002. The application of this interpretation did not have a material
effect on our consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51.", which was
revised in December 2003. This interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in this
interpretation. This interpretation applies immediately to variable
interests in variable interest entities created after January 31, 2003, and
to variable interests in variable interest entities obtained after January
31, 2003. For public enterprises with a variable interest in a variable
interest entity created before February l, 2003, this interpretation
applies to that enterprise no later than the beginning of the first interim
or annual reporting period beginning after December 15, 2003. The
application of this interpretation is not expected to have a material
effect on our consolidated financial statements.

In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." It is effective for contracts entered
into or modified after June 30, 2003, except as stated within the
statement, and should be applied prospectively. The adoption of SFAS No.
149 did not have a material impact on our consolidated financial
statements.

On May 15, 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity. SFAS No. 150 requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. Generally,
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. We adopted the
provisions of SFAS No. 150 on July 1, 2003. The adoption of SFAS No. 150
did not have a material impact on our consolidated financial statements.

In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB No. 104"), "Revenue Recognition",
which codifies, revises and rescinds certain sections of SAB No. 101,
"Revenue Recognition", in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and
SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our consolidated financial statements.

The Company identified its reporting units to be at the same level as the
operating segments as of January 1, 2002. As of January 1, 2002, the
Company had eight operating segments, however, these operating segments
have been aggregated and reported as one reportable segment in accordance
with the aggregation provisions of SFAS No. 131. In applying this same
aggregation criteria, the Company determined that it had one reporting unit
as of January 1, 2002 under SFAS No. 142 "Goodwill and Other Intangible
Assets". At January 1, 2002, the carrying value of the reporting unit
goodwill was $7.5 million. The Company compared the implied fair value of
the reporting unit goodwill with the carrying amount of the

F-14

reporting unit goodwill, both of which were measured as of the date of
adoption. The implied fair value of goodwill was determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to
a purchase price allocation, in accordance with SFAS No. 141. The residual
fair value after this allocation was the implied fair value of the
reporting unit goodwill. The implied fair value of the reporting unit
exceeded its carrying amount and the Company was not required to recognize
an impairment loss.

Application of the provisions of SFAS No. 142 has affected the
comparability of current period results of operations with prior periods
because goodwill is no longer being amortized. Thus, the following
transitional disclosure presents 2001 net income and earnings per share,
adjusted as shown below as if SFAS No. 142 had been applied (in thousands,
except per share data):

2001
--------

Net income $ 19,017

Add Back: amortization of goodwill, net of
taxes* 653
---

Adjusted net income $ 19,670
========

Basic earnings per share $ 0.55

Add back: amortization of goodwill, net of taxes* 0.02
--------

Adjusted basic net earnings per share $ 0.57
========

Diluted earnings per share $ 0.54

Add back: amortization of goodwill, net of taxes* 0.02
--------
Adjusted diluted earnings per share $ 0.56
========


* Amortization of goodwill was non-deductible for income tax purposes,
therefore, the tax component of the adjustment for amortization of goodwill
is $0.


2. Line of Credit and Long-Term Debt

The Company had no long-term debt at December 31, 2003. Long-term debt consisted
of the following at December 31, 2002 (in thousands):



2002
----------------
Note payable to financial institution with monthly principal and
interest payments of $193 through October 2003; the note
is unsecured with interest at a fixed rate of 5.75%. $ 1,876

Notes payable to a third party with a payment totaling $839 due in
2003;the note is secured by real property of the Company and has an
imputed interest
rate of 7.0% 839
----------------
2,715
Less - current portion (2,715)
----------------

$ -
================


F-15

The Company maintains a revolving line of credit (see Note 5) ), which permits
revolving borrowings and letters of credit totaling $10.0 million in the
aggregate, with principal due at maturity and interest payable monthly at two
options (prime or LIBOR plus 0.625%). During 2001, the Company entered into an
interest rate swap agreement on the $12.2 million outstanding under the
revolving line of credit for purposes of better managing cash flow. On November
7, 2001, the Company paid $762,500 to settle this swap agreement. The amount
paid was included in other comprehensive loss and has been fully amortized to
interest expense at December 31, 2003. At December 31, 2003, there were no
outstanding revolving borrowings on the line of credit and issued but unused
letters of credit under the line of credit totaled $7.7 million.

Under the terms of the line of credit and certain notes payable, the Company is
required to maintain certain financial ratios such as net worth and funded debt
to earnings before income taxes, depreciation and amortization. The Company is
also required to maintain certain other covenants relating to corporate
structure, ownership and management. The Company was in compliance with its
financial debt covenants at December 31, 2003.

3. Income Taxes

Income tax expense consists of the following (in thousands):



2003 2002 2001
------------- ------------- -----------
Current income taxes:
Federal $ 12,292 $ 7,849 $ 7,952
State 2,440 2,281 1,872
------------- ------------- -----------
14,732 10,130 9,824
------------- ------------- -----------
Deferred income taxes:
Federal 9,779 7,656 2,649
State (1,171) 1,624 577
------------- ------------- -----------
8,608 9,280 3,226
------------- ------------- -----------
$ 23,340 $ 19,410 $ 13,050
============= ============= ===========


The effective income tax rate is different than the amount which would be
computed by applying statutory corporate income tax rates to income before
income taxes. The differences are summarized as follows (in thousands):


2003 2002 2001
------------- ------------- -----------

Tax at the statutory rate (35%) $ 20,579 $ 16,571 $ 11,223
State income taxes, net of federal benefit 1,924 1,749 826
Other, net 837 1,090 1,001
------------- -------------- -----------
$ 23,340 $ 19,410 $ 13,050
============= ============= ===========


F-16


The net effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002, are as follows (in thousands):



2003 2002
---------- ----------
Short-term deferred tax assets:
Claims accrual $ 5,585 $ 3,764
Other 1,370 1,041
---------- ----------
$ 6,955 $ 4,805
---------- ----------
Short -term deferred tax liabilities:
Prepaid expenses deducted for tax purposes (1,288) (1,377)
---------- ----------
Short-term deferred tax assets, net $ 5,667 $ 3,428
========== ==========
Long-term deferred tax liabilities:
Property and equipment depreciation $ 54,892 $ 43,934
Other 257 368
---------- ----------
$ 55,149 $ 44,302
========== ==========


In management's opinion, it is more likely than not that the Company will be
able to utilize its deferred tax assets in future periods.

4. Commitments and Contingencies

a. Purchase Commitments

As of December 31, 2003, the Company had purchase commitments for
additional tractors and trailers with an estimated purchase price of $46.5
million for delivery throughout 2004. The estimated purchase price does not
reflect estimated trade-in values of approximately $7.5 million that the
Company expects to realize in connection with the purchase of this revenue
equipment. Although the Company expects to take delivery of this revenue
equipment, delays in the availability of equipment could occur due to
factors beyond the Company's control.

b. Other

The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying consolidated financial statements.

On July 31, 2002, the Company reached a resolution of our litigation with
Freightliner, L.L.C. ("Freightliner") through successful mediation. The
Company initiated suit to protect its contractual and other rights
concerning new equipment purchase prices and tractor repurchase commitments
made by Freightliner. Of the net benefits recognized under the settlement
agreement, the majority has been recognized as an adjustment to the basis
of the tractors acquired from Freightliner, which will be depreciated over
the estimated lives of the underlying equipment. In addition, Freightliner
agreed to and did deliver 250 tractors under the settlement agreement.

c. Operating Leases

The Company leases certain revenue equipment under non-cancelable operating
leases. Substantially all of the leases do have early buy-out options under
which the Company has an option to terminate the leases before the lease
term by purchasing the equipment at specified costs according to the
buy-out agreements In accordance with SFAS No. 13, Accounting for Leases,
the rental expense is reflected as an operating expense under "Lease
expense - revenue equipment." Rent expense related to these lease
agreements totaled approximately $7.6 million, $9.4 million and $8.5
million, for the years ended December 31, 2003, 2002 and 2001,
respectively.

F-17

Future lease payments under non-cancelable operating leases are as follows
(in thousands):



Year Ending
December 31, Amount
------------ ------------
2004 $ 3,781
2005 2,951
2006 430
------------
$ 7,162
============


5. Claims Accrual

The primary claims arising for the Company consist of auto liability (personal
injury and property damage), cargo liability, collision, comprehensive and
worker's compensation. During 2003, the Company was self-insured for personal
injury and property damage liability, cargo liability, collision and
comprehensive up to a maximum limit of $2.0 million per occurrence, and the
maximum self-retention for a separate worker's compensation claim was $500,000
per occurrence. The Company establishes reserves to cover these self-insured
liabilities and maintains insurance to cover liabilities in excess of those
amounts. The Company's insurance policies for 2003 provided for excess personal
injury and property damage liability up to a total of $35.0 million per
occurrence (which amount was increased to $40.0 million subsequent to December
31, 2003) and cargo liability, collision, comprehensive and worker's
compensation coverage up to a total of $10.0 million per occurrence. The Company
also maintains excess coverage for employee medical expenses and
hospitalization, and damage to physical properties.

The claims accrual represents accruals for the estimated uninsured portion of
pending claims including adverse development of known claims and incurred but
not reported claims. These estimates are based on historical information along
with certain assumptions about future events. Changes in assumptions as well as
changes in actual experience could cause these estimates to change in the near
term. Liabilities in excess of the self-insured amounts are collateralized by
letters of credit totaling $7.7 million. These letters of credit reduce the
available borrowings under the Company's line of credit. See Note 2.

6. Related Party Transactions

The Company leases land and facilities from a shareholder and director of the
Company, with monthly payments of $6,900. In addition to base rent, the lease
requires the Company to pay its share of all expenses, utilities, taxes and
other charges. Rent expense under this lease was approximately $83,000 during
each of 2003 and 2002, and $81,000 during 2001.

During 2003, 2002,and 2001, the Company made advances of $225,000, $1,845,000
and $750,000, respectively to Concentrek, an entity in which the Company holds a
17% interest. The remaining 83% interest in Concentrek is held by certain
officers, directors, and/or shareholders of the Company and members of
Concentrek's management. During 2003 the Company received $1,600,000 from
Concentrek towards these advances. See Note 1.

The Company paid approximately $11,000, $50,000 and $90,000 for certain of its
key employees' life insurance premiums during 2003, 2002, and 2001,
respectively. A portion of the premiums paid is included in other assets in the
accompanying consolidated balance sheets. The life insurance policies provide
for cash distributions to the beneficiaries of the policyholders upon death of
the key employee. The Company is entitled to receive the total premiums paid on
the policies at distribution prior to any beneficiary distributions.

During 2003, 2002 and 2001, the Company purchased approximately $565,000,
$250,000 and $1.1million, respectively, of communications equipment and services
from the communications technology company in which it formerly had an
investment. The Company originally owned less than four percent of that
technology company, and during 2001 that investment was completely written off.
See Note 1.

F-18

During 2003, 2002 and 2001, the Company paid approximately $25,000, $22,000 and
$64,500, respectively, for legal services to a firm that employs a member of the
Company's Board of Directors.

During 2003, 2002 and 2001, the Company paid approximately $404,000, $326,000
and $620,000, respectively, for travel services for its employees to Knight
Flight, an entity in which the Company holds a 19% interest. The remaining 81%
interest in Knight Flight is held by certain officers, directors, and/or
shareholders of the Company. See Note 1.

The Company has a consulting agreement with a shareholder, director, and former
officer and employee of the Company to provide services related to marketing and
consulting and paid this person approximately $50,000 in each of 2003, 2002 and
2001.

Total Warehousing, Inc., a corporation that is substantially owned by a
shareholder and director of the Company, provided general warehousing services
to the Company in the amount of approximately $3,000, $15,000 and $5,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.

7. Shareholders' Equity

In November 2001, the Company issued 2,678,907 shares of common stock at $16.33
(the Offering). The Offering consisted of 4,928,907 shares of common stock
comprised of 2,678,907 of newly issued Company shares and 2,250,000 shares from
existing shareholders. The net proceeds from the offering were $41.2 million
after deducting offering costs of $2.5 million.

During 2003, 2002 and 2001, certain non-employee Board of Director members each
received their director fees of $6,000, $5,000 and $5,000, respectively, through
the issuance of common stock in equivalent shares. The Company issued a total of
960, 798 and 1,200 shares of common stock to certain directors during 2003, 2002
and 2001, respectively.

8. Employee Benefit Plans

a. 2003 Stock Option Plan

The Company has maintained a stock option plan for the benefit of officers,
employees and directors since 1994. During 2003 the Company's Board of
Directors approved adoption of the "2003 Stock Option Plan" ("2003 Plan"),
along with the termination of the previous plan, which was scheduled to
expire in 2004. The Company's shareholders approved the 2003 Plan at its
annual meeting in May 2003. All issued and outstanding shares under the
previous plan remain in effect, but no further shares will be granted under
that plan. The 2003 Plan has 1,000,000 shares of common stock reserved for
issuance thereunder. The 2003 Plan will terminate on February 5, 2013. The
Compensation Committee of the Board of Directors administers the 2003 Plan
and has the discretion to determine the employees, officers and independent
directors who receive awards, the type of awards to be granted (incentive
stock options, nonqualified stock options and restricted stock grants) and
the term, vesting and exercise price. Incentive stock options are designed
to comply with the applicable provisions of the Internal Revenue Code (the
Code) and are subject to restrictions contained in the Code, including a
requirement that exercise prices are equal to at least 100% of the fair
market value of the common shares on the grant date and a ten-year
restriction on the option term.

Independent directors are not permitted to receive incentive stock options.
Non-qualified stock options may be granted to directors, including
independent directors, officers, and employees and provide for the right to
purchase common stock at a specified price, which may not be less than 85%
of the fair market value on the date of grant, and usually become
exercisable in installments after the grant date. Non-qualified stock
options may be granted for any reasonable term. The Plan provides that each
independent director may receive, on the date of appointment to the Board
of Directors, non-qualified stock options to purchase 2,500 shares of
common stock, at an exercise price equal to the fair market value of the
common stock on the

F-19

date of the grant. In addition Independent Directors will receive
non-qualified stock options to purchase 500 shares for each calendar year
an Independent Director is a Director.

At December 31, 2003, 1,626,785 unexercised options granted under the 2003
Plan and the previous plan were outstanding. 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 used for
grants in 2003; risk free interest rate of 5.00%, expected life of six
years, expected volatility of 50%, expected dividend rate of zero, and
expected forfeitures of 3.82%. The following weighted average assumptions
were used for grants in 2002; risk free interest rate of 3.36%, expected
life of six years, expected volatility of 52%, expected dividend rate of
zero, and expected forfeitures of 3.92%. The following weighted average
assumptions were used for grants in 2001; risk free interest rate of 5.25%,
expected life of six years, expected volatility of 52%, expected dividend
rate of zero, and expected forfeitures of 3.83%.



2003 2002 2001
--------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- --------- ----------- --------- ----------- --------

Outstanding at beginning of year 1,793,008 $ 9.58 1,940,570 $ 7.52 1,922,022 $ 6.16
Granted 308,700 25.58 313,750 19.01 643,573 9.89
Exercised (341,899) 6.50 (303,725) 6.35 (421,576) 5.02
Forfeited (133,024) 12.16 (157,587) 9.52 (203,449) 7.25
-------- ------- ----------- ------- --------- -------
Outstanding at end of year 1,626,785 $ 13.02 1,793,008 $ 9.58 1,940,570 $ 7.52
========= ======= =========== ======= ========= =======
Exercisable at end of year 349,100 $ 6.15 599,932 $ 6.39 385,704 8.55
========= ======= =========== ======= ========= =======

Weighted average fair value of
options granted during the period $ 14.00 $ 11.35 $ 5.49
======= ======= ======


Options outstanding at December 31, 2003, have exercise prices between
$3.56 and $25.73. There were 692,300 options outstanding with exercise
prices ranging from $3.56 to $7.65 with weighted average exercise prices of
$6.40 and weighted average remaining contractual lives of 5.8 years. There
were 373,786 options outstanding with exercise prices ranging from $9.89 to
$15.29 with weighted average exercise prices of $10.98 and weighted average
contractual lives of 8.7 years. There were 560,699 options outstanding with
exercise prices ranging from $16.07 to $25.73 with weighted average
exercise prices of $22.56 and weighted average contractual lives of 9.1
years.

b. 401(k) Profit Sharing Plan

The Company has a 401(k) profit sharing plan (the Plan) for all employees
who are 19 years of age or older and have completed one year of service
with the Company. The Plan provides for a mandatory matching contribution
equal to 50% of the amount of the employee's salary deduction not to exceed
$625 annually per employee. The Plan also provides for a discretionary
matching contribution. In 2003, 2002, and 2001, there were no discretionary
contributions. Employees' rights to employer contributions vest after five
years from their date of employment. The Company's matching contribution
was approximately $172,000, $150,000 and $125,000 in 2003, 2002 and 2001,
respectively.

F-20



SCHEDULE II

KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands)



Balance at Balance at
Beginning Expense End
of Period Recorded Deductions of Period
------------- -------------- ------------ -------------
Allowance for doubtful accounts:
Year ended December 31, 2003 $ 1,325 $ 801 $ (184) (1) $ 1,942
Year ended December 31, 2002 1,132 537 (344) (1) 1,325
Year ended December 31, 2001 1,121 456 (445) (1) 1,132

Allowance for doubtful notes receivable:
Year ended December 31, 2003 142 10 (15) (1) 137
Year ended December 31, 2002 66 76 - 142
Year ended December 31, 2001 81 14 (29) (1) 66

Claims accrual:
Year ended December 31, 2003 10,419 16,558 (12,172) (2) 14,805
Year ended December 31, 2002 7,509 12,377 (9,467) (2) 10,419
Year ended December 31, 2001 5,554 10,230 (8,275) (2) 7,509


(1) Write-off of bad debts

(2) Cash paid for claims and premiums

F-21



EXHIBIT INDEX



Exhibit
Number Descriptions
- ------- ------------

3.1 Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 No. 33-83534.)

3.1.1 First Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.1 to the Company's Report on Form
10-K for the period ending December 31, 2000.)

3.1.2 Second Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.2 to the Company's Registration
Statement on Form S-3 No. 333-72130.)

3.1.3 Third Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.3 to the Company's Report on Form
10-K for the period ending December 31, 2002.)

3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-3 No. 333-72130.)

3.2.1 First Amendment to Restated Bylaws of the Company. (Incorporated by
reference to Exhibit 3.2.1 to the Company's Report on Form 10-K for the
period ending December 31, 2002.)

4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the
Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form
10-K.)

4.2 Sections 2 and 5 of the Restated Bylaws of the Company. (Incorporated by
reference to Exhibit 3.2 to this Report on Form 10-K.)

10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of
March 1, 1994, between Randy Knight, the Company, and Lawyers Title of
Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-83534.)

10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow
Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No.
3 to the Company's Registration Statement on Form S-1 No. 33-83534.)

10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 No. 33-83534.)

10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company
dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 No. 33-83534.)





10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between
L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight
Transportation, Inc. and certain other parties dated March 11, 1994
(assigning the lessor's interest to the R. K. Trust). (Incorporated by
reference to Exhibit 10.2.1 to the Company's Report on Form 10-K for the
period ending December 31, 1997.)

10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy
Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight
Transportation, Inc., dated as of September 1, 1997. (Incorporated by
reference to Exhibit 10.2.2 to the Company's Report on Form 10-K for the
period ending December 31, 1997.)

10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash)
dated as of October 1994, between the Company and Knight Deer Valley,
L.L.C., an Arizona limited liability company. (Incorporated by reference to
Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 No. 33-83534.)

10.4 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated
as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the
Company's Notice and Information Statement on Schedule 14(c) for the period
ending December 31, 1997.)

10.5 Amended Indemnification Agreements between the Company, Don Bliss, Clark A.
Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D.
Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997.
(Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-K for the period ending December 31, 1996).

10.5.1 Indemnification Agreements between the Company and Timothy M. Kohl and
Matt Salmon, dated as of October 16, 2000, and May 9, 2001, respectively.
(Incorporated by reference to Exhibit 10.6.1 to the Company's Report on
Form 10-K for the period ending December 31, 2001.)

10.5.2* Indemnification Agreements between the Company and Mark Scudder and
Michael Garnreiter, dated as of November 10, 1999, and September 19, 2003,
respectively.

10.6 Master Equipment Lease Agreement dated as of January 1, 1996, between the
Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7
to the Company's Report on Form 10-K for the period ended December 31,
1995.)

10.7 Purchase Agreement and Escrow Instructions dated as of July 13, 1995,
between the Company, Swift Transportation Co., Inc. and United Title Agency
of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's
Report on Form 10-K for the period ended December 31, 1995.)

10.7.1 First Amendment to Purchase Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.8.1 to the Company's Report on
Form 10-K for the period ended December 31, 1995.)

10.8 Purchase and Sale Agreement dated as of February 13, 1996, between the
Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit
10.9 to the Company's Report on Form 10-K for the period ended December 31,
1995.)

10.9 Asset Purchase Agreement dated March 13, 1999, by and among Knight
Transportation, Inc., Knight Acquisition Corporation, Action Delivery
Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis.
(Incorporated by reference to Exhibit 2.1 to the





Company's Report on Form 8-K filed with the Securities and Exchange
Commission on March 25, 1999.)

10.10 Master Equipment Lease Agreement dated as of October 28, 1998, between
Knight Transportation Midwest, Inc., formerly known as "Knight
Transportation Indianapolis, Inc." and Quad-K Leasing, Inc. (Incorporated
by reference to Exhibit 10.11 to the Company's Report on Form 10-K for the
period ending December 31, 1999.)

10.11 Consulting Agreement dated as of March 1, 2000 between Knight
Transportation, Inc. and LRK Management, L.L.C. (Incorporated by reference
to Exhibit 10.12 to the Company's Report on Form 10-K for the period ending
December 31, 1999.)

10.12 Stock Purchase Agreement dated April 19, 2000 by and among Knight
Transportation, Inc., as Buyer, John R. Fayard, Jr., and John Fayard Fast
Freight, Inc. (Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on May 4, 2000.)

10.13 Credit Agreement by and among Knight Transportation, Inc., Wells Fargo
Bank and Northern Trust Bank, dated April 6, 2001. (Incorporated by
reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the
period ending June 30, 2001.)

10.13.1 Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated February 13, 2003.
(Incorporated by reference to Exhibit 10.14.1 to the Company's Report on
Form 10-K for the period ending December 31, 2002.)

10.13.2* Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated September 15, 2003.

10.13.3* Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated December 15, 2003.

10.14 Knight Transportation, Inc. 2003 Stock Option Plan. (Incorporated by
reference to Exhibit 1 to the Company's Definitive Proxy Statement on
Schedule 14A relating to its Annual Meeting of Shareholders held on May 21,
2003.)

21.1* Subsidiaries of the Company.

23.1* Consent of KPMG LLP.

31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Kevin P.
Knight, the Company's Chief Executive Officer.

31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David A.
Jackson, the Company's Chief Financial Officer.

32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Kevin P. Knight, the
Company's Chief Executive Officer.





32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Jackson, the
Company's Chief Financial Officer.

- ------------------
* Filed herewith.