Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o        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 0-20797

RUSH ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

555 I.H. 35 South, Suite 500

New Braunfels, Texas 78130

(Address of principal executive offices)

(Zip Code)

(830) 626-5200

(Registrant’s telephone number, including area code)

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  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o        No  x

Indicated below is the number of shares outstanding of each of the issuer’s classes of common stock, as of November 3, 2008.

Table of Contents

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

 (In Thousands, Except Shares)

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

3

Table of Contents

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

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

4

Table of Contents

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

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

5

Table of Contents

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1 – Principles of Consolidation and Basis of Presentation

The interim consolidated financial statements included herein have been prepared by Rush Enterprises, Inc. and its subsidiaries (collectively referred to as the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  All adjustments have been made to the accompanying interim consolidated financial statements, which, in the opinion of the Company’s management, are necessary for a fair presentation of the Company’s operating results.  All adjustments are of a normal recurring nature.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  It is recommended that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

On September 20, 2007, our shareholders approved an amendment to Rush Enterprises, Inc.’s Restated Articles of Incorporation increasing the total number of authorized shares of Class A common stock from 40,000,000 to 60,000,000 and total number of authorized shares of Class B common stock from 10,000,000 to 20,000,000.  On the same date, our Board of Directors declared a 3-for-2 stock split of the Class A common stock and Class B common stock, to be effected in the form of a stock dividend.  On October 10, 2007, Rush Enterprises, Inc. distributed one additional share of stock for every two shares of Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, held by shareholders of record as of October 1, 2007.  All share and per share data (except par value) in this Form 10-Q have been adjusted and restated to reflect the stock split as if it occurred on the first day of the earliest period presented.

2 – Goodwill and Other Intangible Assets

The Company performs an annual impairment review of goodwill during the fourth quarter of each year.  Management is not aware of any impairment charge that may currently be required; however, a change in economic conditions, if one occurs, could result in an impairment charge in future periods.

3 – Commitments and Contingencies

The Company is contingently liable to finance companies for certain notes initiated on behalf of such finance companies related to the sale of trucks and construction equipment.  The majority of finance contracts are sold without recourse against the Company. A majority of the Company’s liability related to finance contracts sold with recourse is generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of the finance company. However, the Company has a finance program that accepts 100% liability, with some restrictions, for the outstanding amount of each note initiated on behalf of the finance company.  In order for a contract to be accepted into this finance program, a customer must meet strict credit requirements or maintain a significant equity position in the truck being financed; consequently, less than 1% of the Company’s portfolio balance related to finance contracts sold by the Company are under this 100% liability finance program and the Company does not expect to finance a significant percentage of its truck sales under this 100% liability finance program in the future. The Company provides for an allowance for repossession losses and early repayment penalties that it may be liable for under finance contracts sold.

During the second quarter of 2007, the Company renegotiated its contractual obligations with its retail funding sources regarding early repayment penalties, which occur as a result of a premature termination of finance contracts sold by the Company.  As a result of these negotiations, the Company expects to decrease the amount of finance income it will recognize at the time the contract is sold and also decrease the amount of early repayment penalties it will owe its retail funding sources in the future.

The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company’s financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations for the fiscal period in which such resolution occurred.

6

Table of Contents

4 – Earnings Per Share

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

5 – Stock Options

Valuation and Expense Information under SFAS 123(R)

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors including employee stock options, restricted share awards and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values.  Stock-based compensation expense, calculated using the Black-Scholes option-pricing model and included in selling, general and administrative expense, was $0.6 million for the three months ended September 30, 2008 and $0.5 million for the three months ended September 30, 2007.  Stock-based compensation expense, included in selling, general and administrative expense, for the nine months ended September 30, 2008 was $3.0 million and for the nine months ended September 30, 2007 was $2.9 million.  As of September 30, 2008, there was $4.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Rush Enterprises, Inc. Long-Term Incentive Plan to be recognized over a weighted-average period of 3.0 years.

6 – Acquisitions

In May 2008, the Company acquired certain assets of Peterbilt Carolina, Inc., which includes a Peterbilt, Hino and Isuzu heavy- and medium-duty truck dealership, and their related franchise rights, in Charlotte, North Carolina.  The Company is operating the facility as a full-service Rush Truck Center offering Peterbilt heavy- and medium-duty trucks as well as medium-duty trucks manufactured by Hino and Isuzu, and parts and service.  The transaction was valued at approximately $13.4 million, with the purchase price paid in cash.

The operations of Peterbilt Carolina, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition.  Pro forma information is not included because Peterbilt Carolina, Inc.’s results of operations would not have a material effect on the Company’s financial statements.  The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):

7

Table of Contents

All of the goodwill acquired in the Peterbilt Carolina, Inc. acquisition will be amortized over 15 years for tax purposes.

In May 2008, the Company executed agreements to acquire the common stock of Adams International Trucks, Inc., an International heavy- and medium-duty truck dealership in Charlotte, North Carolina and the related International franchise rights.  The Company is operating the facility as a full-service Rush Truck Center offering International heavy- and medium-duty trucks, parts and service and leasing.  The transaction was valued at approximately $20.1 million, with the purchase price paid in cash.

The operations of Adams International Trucks, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition.  Pro forma information is not included because Adams International Trucks, Inc.’s results of operations would not have a material effect on the Company’s financial statements.  The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):

The portion of goodwill related to the stock purchase of Adams International Trucks, Inc. will not be amortized for tax purposes, while the portion of goodwill related to the acquisition of the International franchise rights will be amortized over 15 years for tax purposes.

Additionally, the Company purchased the real estate of the above dealership operations for $6.2 million.  The real estate transaction was financed by a bank with a $5.0 million note payable.

7 – Investments

On a quarterly basis, the Company assesses its investments for impairment.  If the investments are deemed to be impaired, the Company determines whether the impairment is temporary or other than temporary.  If the impairment is deemed to be temporary, the Company records an unrealized loss in other comprehensive income.  If the impairment is deemed other than temporary, the Company records the impairment in the Company’s consolidated statement of income.

The Company historically invested in interest-bearing short-term investments primarily consisting of investment-grade auction rate securities classified as available-for-sale and reported at fair value.  These types of investments were designed to provide liquidity through an auction process that reset the applicable interest rates at predetermined periods ranging from 1 to 35 days.  This reset mechanism was intended to allow existing investors to continue to own their respective interest in the auction rate security or to gain immediate liquidity by selling their interests at par.

As a result of the recent liquidity issues experienced in the global capital markets, auctions for investment grade securities held by the Company have failed.  An auction fails when there is insufficient demand.  However, a failed auction does not represent a default by the issuer.  The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop.  The Company believes that its auction rate securities will liquidate within the next twelve months and has classified them as a current asset on its consolidated balance sheet.  The Company has the intent and ability to hold these auction rate securities until liquidity returns to the market.  The Company does not believe that the lack of liquidity relating to its auction rate securities will have a material impact on its ability to fund operations.

As of December 31, 2007, the Company did not carry any short-term investments, as its previous practice had been to liquidate its short-term investments, including auction rate securities near the end of each fiscal quarter.  However, as of September 30, 2008, the Company holds $7.6 million of auction rate securities with underlying tax-exempt municipal bonds with stated maturities of 22 years.  These bonds have credit wrap insurance and have been rated AAA by credit agencies.

8

Table of Contents

The Company believes that the credit quality and fair value of the auction rate securities it holds has not been negatively impacted; therefore, no impairment charges have been recorded as of September 30, 2008.  As of September 30, 2008, the Company has valued these investments at fair value, which approximates cost.  The Company used observable inputs to determine fair value, including consideration of broker quotes, the overall quality of the underlying municipality, the credit quality of the insurance company, as well as successful subsequent auctions.  Accordingly, the Company has considered this fair value to be a Level 2 valuation under SFAS No. 157, “Fair Value Measurement.”  If the credit quality of these investments deteriorates, or adverse developments occur in the bond insurance market, the Company may be required to record an impairment charge on these investments in the future.

8 – Segment Information

The Company currently has two reportable business segments: the Truck Segment and the Construction Equipment Segment. The Truck Segment operates a network of Rush Truck Centers that provides an integrated one-stop source for the trucking needs of its customers, including retail sales of new and used medium-duty and heavy-duty trucks; aftermarket parts, service and body shop facilities; and a wide array of financial services, including the financing of new and used truck purchases, insurance products and truck leasing and rentals. The Construction Equipment Segment operates a full-service John Deere construction equipment dealership that serves the Houston, Texas metropolitan area. Construction Equipment Segment operations include the retail sale of new and used construction equipment, aftermarket parts and service facilities, and the financing of new and used construction equipment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the annual report. The Company evaluates performance based on income before income taxes not including extraordinary items.

The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties; that is, at current market prices. There were no material intersegment sales during the quarters ended September 30, 2008 and 2007.

9

Table of Contents

The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business unit requires different technology and marketing strategies. Business units were maintained through expansion and acquisitions.  The following table contains summarized information about reportable segment profit or loss and segment assets for the periods ended September 30, 2008 and 2007 (in thousands):

Revenues from segments below the quantitative thresholds requiring them to be reported separately are attributable to three operating segments of the Company. These segments include a tire company, an insurance agency, and a hunting lease operation. None of these segments has ever met any of the quantitative thresholds that would require them to be reported separately.

9 – Income Taxes

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns.  FIN 48 requires that only income tax benefits meeting the “more likely than not” recognition threshold be recognized or continue to be recognized on its effective date.  As required, the Company has adopted the provisions of FIN 48 effective January 1, 2007.

The Company included accruals for unrecognized income tax benefits totaling $2.0 million as a component of accrued liabilities as of September 30, 2008 and December 31, 2007.  The unrecognized tax benefits of $2.0 million at September 30, 2008, if recognized, would impact the Company’s effective tax rate.  As of September 30, 2008, the Company accrued interest of $171,000 related to unrecognized tax benefits in the current provision for income taxes.  No amounts were accrued for penalties.

The Company does not anticipate a significant change in the amount of unrecognized tax benefits in the next 12 months.  As of September 30, 2008, the tax years ended December 31, 2004, through 2007 remained subject to examination by tax authorities.

10

Table of Contents

10 – Stock Repurchase Plan

On July 22, 2008, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase, from time to time, up to an aggregate of $20,000,000 of its shares of Class A common stock, $.01 par value per share, and/or Class B common stock, $.01 par value per share.  Repurchases will be made at times and in amounts as the Company deems appropriate and will be made through open market transactions, privately negotiated transactions and other lawful means. The manner, timing and amount of any repurchases will be determined by the Company based on an evaluation of market conditions, stock price and other factors, including those related to the ownership requirements of its dealership agreements with manufacturers it represents. The stock repurchase program has no expiration date and may be suspended or discontinued at any time.  While the stock repurchase program does not obligate the Company to acquire any particular amount or class of common stock, the Company anticipates that it will be repurchasing primarily shares of its Class B common stock.

As of September 30, 2008, the Company repurchased 779,215 shares of Class B common stock at a cost of $10.0 million.  The Company is holding the repurchased shares of the common stock as treasury stock and is accounting for the treasury stock pursuant to the cost method.  The Company includes treasury stock as a component of stockholders’ equity.

11 – Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer:  (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled.  SFAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition.  SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company does not expect the adoption of SFAS 141(R) to have a significant impact on its consolidated results of operations and financial position, but will impact any business combinations that close on or after January 1, 2009.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in accordance with GAAP. With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We have evaluated the new statement and have determined that it will not have a significant impact on the determination or reporting of our financial results.

11

Table of Contents

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the SEC, news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company’s financial position, business strategy and plans and objectives of management of the Company for future operations.  Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Forward-looking statements reflect the current views and assumptions of Company management with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those set forth under Item 1A—Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (as updated in Item 1A of the Company’s Form 10-Q for the quarter period ended March 31, 2008 and in Item 1A of this Form 10-Q) as well as future growth rates and margins for certain of our products and services, future demand for our products and services, competitive factors, general economic conditions, availability of credit, cyclicality, economic conditions in the new and used truck and equipment markets, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in the Company’s other reports filed with the SEC (collectively, “Cautionary Statements”). Although the Company believes that its expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable Cautionary Statements. The Company undertakes no duty to update these forward-looking statements.

The following comments should be read in conjunction with the consolidated financial statements and related notes included in both the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and in this Quarterly Report on Form 10-Q.

Note Regarding Trademarks Used in This Form 10-Q

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. GMC® is a registered trademark of General Motors Corporation. Hino® is a registered trademark of Hino Motors, Ltd. UD® is a registered trademark of Nissan Diesel Motor Co., Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. John Deere® is a registered trademark of Deere & Company. Kenworth® is a registered trademark of PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc. Navistar® is a registered trademark of Navistar International Corporation. Caterpillar® is a registered trademark of Caterpillar, Inc. Cummins® is a registered trademark of Cummins Engine Company, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of Citicorp. Ford® is a registered trademark of Ford Motor Company.  Cummins® is a registered trademark of Cummins Intellectual Property, Inc.  Eaton is a registered trademark of Eaton Corporation.  Arvin Meritor® is a registered trademark of Meritor Technology, Inc.®  Case is a registered trademark of Case Corporation.  Komatsu® is a registered trademark of Kabushiki Kaisha Komatsu Seisakusho Corporation Japan.  The CIT Group® is a registered trademark of CIT Group Holdings, Inc.  JPMorgan Chase® is a registered trademark of JP Morgan Chase & Co.  SAP® is a registered trademark of SAP Aktiengesellschaft.  International® is a registered trademark of Navistar International Transportation Corp. Blue Bird® is a registered trademark of Blue Bird Investment Corporation.

General

Rush Enterprises, Inc. was incorporated in Texas in 1965 and currently consists of two reportable segments: the Truck Segment and the Construction Equipment Segment.  The Company currently conducts business through numerous subsidiaries, all of which it wholly owns, directly or indirectly.  Its principal offices are located at 555 IH 35 South, New Braunfels, Texas 78130.

12

Table of Contents

The Company is a full-service, integrated retailer of premium transportation and construction equipment and related services.  The Company’s Rush Truck Centers sell trucks manufactured by Peterbilt Motors Company (a division of PACCAR, Inc.), International, Volvo, GMC, Hino, UD, Ford, Isuzu and Blue Bird.  The Company also operates a John Deere construction equipment dealership at its Rush Equipment Center in Houston, Texas. Through its strategically located network of Rush Truck Centers and its Rush Equipment Center, the Company provides one-stop service for the needs of its customers, including retail sales of new and used trucks and construction equipment, aftermarket parts sales, service and repair facilities, and financing, leasing and rental, and insurance products.

The Company’s Rush Truck Centers are principally located in high traffic areas throughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate more than 50 Rush Truck Centers in Alabama, Arizona, California, Colorado, Florida, Georgia, New Mexico, North Carolina, Oklahoma, Tennessee and Texas.

Our business strategy consists of providing our customers with competitively priced products supported with timely and reliable service through our integrated dealer network. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers and Rush Equipment Center as we extend our geographic focus through strategic acquisitions of new locations and expansions of our existing facilities and product lines.

In May 2008, the Company acquired certain assets of Peterbilt Carolina, Inc., which includes a Peterbilt, Hino and Isuzu heavy- and medium-duty truck dealership in Charlotte, North Carolina.  The Company is operating the facility as a full-service Rush Truck Center offering Peterbilt heavy-duty and medium-duty trucks as well as medium-duty trucks manufactured by Hino and Isuzu, and parts and service.  The transaction was valued at approximately $13.4 million, with the purchase price paid in cash.

In May 2008, the Company also acquired the common stock of Adams International Trucks, Inc., an International heavy- and medium-duty truck and Workhorse Custom Chassis dealership in Charlotte, North Carolina.  The Company is operating the facility as a full-service Rush Truck Center offering International heavy-duty and medium-duty trucks, parts and service and leasing.  The transaction was valued at approximately $20.1 million, with the purchase price paid in cash.  Included in the acquisition was the purchase of Adams Collision Center.  The Company also purchased the real estate used in the operations of Adams International Trucks, Inc. for $6.2 million.

See Note 6–Acquisitions of the Notes to the Consolidated Financial Statements for a detailed discussion of the allocation of the purchase price of the Company’s acquisitions during 2008.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those estimates.  The Company believes the following accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Inventories

Inventories are stated at the lower of cost or market value.  Cost is determined by specific identification of new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories.  An allowance is provided when it is anticipated that cost will exceed net realizable value plus a reasonable profit margin.

Goodwill

The Company applies the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), in accounting for goodwill.  SFAS 142 requires that goodwill and other intangible assets that have indefinite useful lives may not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives.  SFAS 142 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment.  SFAS 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the

13

Table of Contents

fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market condition, projected cash flows, interest rates and growth rates, which could significantly impact the reported value of goodwill and other intangible assets.  SFAS 142 requires, in lieu of amortization, an annual impairment review of goodwill.  The Company performs its annual review during the fourth quarter of each year and, therefore, did not record an impairment charge related to goodwill during the third quarter of 2008.  Management is not aware of any impairment charge that may be required; however, a change in economic conditions, if one occurs, could result in an impairment charge in the future.

Revenue Recognition Policies

Income on the sale of a truck or a piece of construction equipment is recognized when the customer executes a purchase contract with us, the unit has been delivered to the customer and there are no significant uncertainties related to financing or collectibility. Lease and rental income is recognized over the period of the related lease or rental agreement. Parts and service revenue is recognized at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer’s unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.

Finance and Insurance Revenue Recognition

Finance income related to the sale of a unit is recognized when the finance contract is sold to a finance company.  The Company arranges financing for customers through various retail funding sources and receives a commission from the lender equal to either the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution or a commission for the placement of contracts. The Company also receives commissions from the sale of various insurance products to customers.  Revenue is recognized by the Company upon the sale of such finance and insurance contracts to the finance and insurance companies net of a provision for estimated repossession losses and interest charge-backs on finance contracts. The Company is not the obligor under any of these underlying contracts. In the case of finance contracts, a customer may prepay, or fail to pay, thereby terminating the underlying contract. If the customer terminates a retail finance contract or other insurance product prior to scheduled maturity, a portion of the commissions previously paid to the Company may be charged back to the Company depending on the terms of the relevant contracts. The estimate of ultimate charge-back exposure is based on the Company’s historical charge-back expense arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on other insurance products. The actual amount of historical charge-backs has not been significantly different than the Company’s estimates.

Insurance Accruals

The Company is partially self-insured for medical, workers compensation, and property and casualty insurance and calculates a reserve for those claims that have been incurred but not reported and for the remaining portion of those claims that have been reported. The Company uses information provided by third-party administrators to determine the reasonableness of the calculations it performs.

Accounting for Income Taxes

Significant management judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part.  Deferred income 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 income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable.  The Company has a valuation allowance related to deferred tax assets in certain states.  Accordingly, the facts and financial circumstances impacting state deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required in any given period.

Additionally, despite the Company’s belief that its tax return positions are consistent with applicable tax law, management believes that certain positions may be challenged by taxing authorities.  Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations.

Effective January 1, 2007, the Company adopted FIN 48.  This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.  FIN 48 prescribes how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns.  FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to

14

Table of Contents

be recognized on its effective date.  The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.  Unfavorable settlement of any particular issue would require use of the Company’s cash and a charge to income tax expense.  Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.

Stock-Based Compensation Expense

The Company applies the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options and employee stock purchases under the Employee Stock Purchase Plan based on estimated fair values.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based payment awards on the date of grant.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Income.

15

Table of Contents

Results of Operations

The following discussion and analysis includes the Company’s historical results of operations for the three months and nine months ended September 30, 2008 and 2007.

The following table sets forth for the periods indicated certain financial data as a percentage of total revenues:

The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty, and used trucks and the absorption rate for the periods indicated (revenue in thousands):

(1) Includes sales of glider kits, truck bodies, trailers and other new equipment.

16

Table of Contents

Key Performance Indicator

Absorption Rate. The management of the Company uses several performance metrics to evaluate the performance of its dealerships.  The Company considers its “absorption rate” to be of critical importance.  Absorption rate is calculated by dividing the gross profit from the parts, service and body shop departments by the overhead expenses of all of a dealership’s departments, except for the selling expenses of the new and used truck departments and carrying costs of new and used truck inventory.  When 100% absorption is achieved, then gross profit from the sale of a truck, after sales commissions and inventory carrying costs, directly impacts operating profit.  In 1999, the Company’s truck dealerships’ absorption rate was approximately 80%.  The Company has made a concerted effort to increase its absorption rate since then.  Management believes that maintaining an absorption rate in excess of 100% is critical to the Company’s ability to generate consistent earnings in a cyclical business.  The Company’s truck dealerships achieved a 104.5% absorption rate for the year in 2007 and 106.3% absorption rate for the first nine months of 2008.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Class 8 and medium-duty new and used truck markets remained weak through the third quarter of 2008.  The Company believes that the continuation of the weak freight environment, slowing construction markets, historically high fuel prices and tight credit markets will cause both heavy- and medium-duty truck deliveries to remain soft through 2009.  A.C.T. Research Co., LLC (“A.C.T. Research”), a truck industry data and forecasting service provider, currently predicts U.S. retail sales of Class 8 trucks of approximately 138,000 units in 2008, a 12.6% decline from the number of deliveries in 2007, and 180,000 units in 2009.  However, the Company believes 2009 sales of heavy-duty trucks will remain relatively flat compared to 2008.  Based on current economic and market conditions, the Company does not expect a significant pre-buy of Class 8 trucks to occur in 2009 as a result of diesel emissions regulations that go into effect in 2010.  The Company currently anticipates some recovery of the Class 8 truck market to begin late in 2009, given impending 2010 diesel emissions regulations.

Medium-duty truck sales remained consistent with the industry, which declined 41% in the third quarter of 2008 as compared to 2007 according to A.C.T. Research.  A.C.T. Research currently predicts U.S. retail sales of Class 4, 5, 6, and 7 medium-duty trucks of approximately 185,000 units in 2008, a 22.8% decline from the number of deliveries in 2007, and 180,000 units in 2009.

Truck, construction equipment and leasing operations in East Texas were adversely impacted by Hurricane Ike, which shut down our operations in Houston and East Texas for several days in the third quarter.  Dealership operations experienced business interruption resulting from mandatory evacuations, power outages, restricted traffic and reduced employee attendance.  Although difficult to quantify, these storms had a negative impact to earnings in the third quarter.

Parts, service and body shop sales increased slightly in the third quarter of 2008 compared to the third quarter of 2007.  The Company expects parts, service and body shop sales to slightly decline in the first half of 2009 compared to the same period in 2008 and begin to rebound in the latter half of 2009.  This quarter’s increased absorption rate of 108.6%, compared to 105.1% in the third quarter of 2007, is due to significant reductions in the Company’s expense structure and the ability of its people to control costs.

Revenues

Revenues decreased $107.9 million, or 20.7%, in the third quarter of 2008 compared to the third quarter of 2007.  Sales of new and used trucks decreased $97.9 million, or 27.4%, in the third quarter of 2008 compared to the third quarter of 2007.  Uncertain economic conditions, the weak freight environment, slowing construction markets, historically high fuel prices and tight credit markets contributed to decreased demand for Class 8, medium-duty and used trucks in the third quarter of 2008.

Unit sales of new Class 8 trucks decreased 25.8% in the third quarter of 2008 compared to the third quarter of 2007.  New Class 8 truck sales revenue decreased approximately $61.0 million, or 27.3%, in the third quarter of 2008 compared to the third quarter of 2007.  A.C.T. Research estimates that unit sales of Class 8 trucks in the U.S. increased approximately 8% in the third quarter of 2008 compared to the third quarter of 2007. Historically, the Company’s share of the U.S. Class 8 truck market has ranged between 4.1% and 4.6%.  Based on current Class 8 retail sales estimates of 138,000 units for 2008, the Company expects to sell approximately 5,600 to 5,800 Class 8 trucks in 2008.

Unit sales of new medium-duty trucks decreased 39.5% in the third quarter of 2008 compared to the third quarter of 2007.  New medium-duty truck sales revenue decreased approximately $21.5 million, or 28.4%, in the third quarter of 2008 compared to the third quarter of 2007.  A.C.T. Research estimates that unit sales of Class 4 through 7 trucks in the U.S.

17

Table of Contents

decreased approximately 41% in the third quarter of 2008 compared to the third quarter of 2007.  In 2007, the Company achieved a 2.2% share of the Class 4 through 7 truck sales market in the U.S.  The Company expects its share to range between 1.9% to 1.95% of the U.S. Class 4 through 7 truck sales market in 2008, which would result in the sale of approximately 3,500 to 3,600 Class 4 through 7 trucks based on A.C.T. Research’s current 2008 U.S. retail sales estimates of 185,000 units.

Unit sales of used trucks decreased 9.3% in the third quarter of 2008 compared to the third quarter of 2007. Used truck sales revenue decreased approximately $10.9 million, or 20.7%, in the third quarter of 2008 compared to the third quarter of 2007. During the third quarter of 2008, average revenue per used truck unit decreased by approximately 8.7% compared to the third quarter of 2007.  For the remainder of 2008, used truck sales volumes and prices will be primarily driven by general economic conditions, fuel prices and the availability of credit, which collectively have had a severe impact on this market during the first nine months of 2008.  The Company expects to sell approximately 3,400 to 3,600 used trucks in 2008.

Parts and service sales increased $0.4 million, or 0.4%, in the third quarter of 2008 compared to the third quarter of 2007.  The slight increase in parts and service sales was a result of acquisitions made in the first half of 2008.    Parts and service sales, exclusive of acquisitions, decreased approximately 3.9% in the third quarter of 2008 compared to 2007 primarily due to weakening economic conditions.  The Company expects parts and service sales to decrease slightly in the fourth quarter of 2008 compared to the same period in 2007.

Sales of new and used construction equipment decreased $7.8 million, or 40.0%, in the third quarter of 2008 compared to the third quarter of 2007.  This decrease was largely attributable to the weakening construction market in the Houston area.  John Deere’s rolling twelve month average market share in the Houston area construction equipment market decreased to 16.8% as of September 30, 2008 from a rolling twelve month average of 18.6% as of September 30, 2007.  In 2009, the Company expects new construction equipment unit sales in our area of responsibility to decrease approximately 10% to 18%, compared to 2008, to approximately 1,800 to 2,000 units.

Truck lease and rental revenues increased $0.7 million in the third quarter of 2008 compared to the third quarter of 2007.  The Company expects lease and rental revenue to increase slightly during the remainder of 2008 compared to 2007.

Finance and insurance revenues decreased $2.7 million, or 50.1%, in the third quarter of 2008 compared to the third quarter of 2007.  The decrease in finance and insurance revenue is a direct result of the overall decline in truck sales and the tight credit market.  Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of the Company’s operating profits.

Other income decreased $0.7 million, or 31.7%, in the third quarter of 2008 compared to the third quarter of 2007.  Other income consists of the gain on sale realized on trucks from the lease and rental fleet, commissions earned from John Deere for direct manufacturer sales into our area of responsibility, document fees related to truck sales and purchase discounts.

Gross Profit

Gross profit decreased $13.4 million, or 14.9%, in the third quarter of 2008 compared to the third quarter of 2007.  Gross profit as a percentage of total revenue increased to 18.5% in the third quarter of 2008 from 17.2% in the third quarter of 2007.  This percentage increase is primarily a result of a change in our product sales mix.  Truck sales, a lower margin revenue item, decreased as a percentage of total revenue to 62.7% in the third quarter of 2008 from 68.5% in the third quarter of 2007.  Parts and service revenue, a higher margin revenue item, increased as a percentage of total revenue to 30.0% in the third quarter of 2008 from 23.7% in the third quarter of 2007.

Gross margins on Class 8 truck sales decreased to 6.8% in the third quarter of 2008 from 8.6% in the third quarter of 2007.  For the remainder of 2008, the Company expects overall gross margins from Class 8 truck sales of approximately 6.5% to 8.0% due to the current weak Class 8 truck market.

Gross margins on medium-duty truck sales decreased slightly to 5.2% in the third quarter of 2008 from 5.3% in the third quarter of 2007.  For 2008, the Company expects overall gross margins from medium-duty truck sales of approximately 5.0% to 6.5%.  The Company’s gross margins on medium-duty trucks are difficult to forecast accurately because gross margins vary significantly depending upon the mix of fleet and non-fleet purchasers and types of medium-duty trucks sold.

18

Table of Contents

Gross margins on used truck sales increased slightly to 8.8% in the third quarter of 2008 from 8.7% in the third quarter of 2007.  The Company believes it will be able to achieve margins of approximately 7.0% to 8.5% during the remainder of 2008, excluding adjustments for any valuation write-downs the Company may take.

Gross margins from the Company’s parts, service and body shop operations increased to 41.4% in the third quarter of 2008 from 40.6% in the third quarter of 2007.  Gross profit for the parts, service and body shop departments was $51.3 million in the third quarter of 2008 compared to $50.3 million in the third quarter of 2007.  The Company expects gross margins on parts, service and body shop operations of approximately 38.0% to 41.0% for the remainder of 2008.

Gross margins on new and used construction equipment sales decreased to 8.9% in the third quarter of 2008 compared to 10.1% in the third quarter of 2007.  This decrease in gross margin is primarily attributable to decreased demand for construction equipment in the Houston market and our continued efforts to increase John Deere’s market share.  The Company expects 2008 gross margins on new and used construction equipment sales to remain in a range of approximately 9.0% to 11.0% as the Company attempts to increase its market share.