SEC Filing - Rush Enterprises, Inc.

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
AMENDMENT NO. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996

Commission file number 0-20797

RUSH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

TEXAS 74-1733016
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification No.)

8810 IH-10 EAST, SAN ANTONIO, TEXAS 78219
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (210) 661-4511

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)

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
PERIODS 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. ______

The aggregate market value of voting stock held by
non-affiliates of the registrant as of March 21, 1997 was approximately
$23,302,500, based upon the last sales price on March 21, 1997 on the NASDAQ
National Market for the Company's common stock. The registrant had 6,643,730
shares of Common Stock outstanding on March 21, 1997.

DOCUMENTS INCORPORATED BY REFERENCE
PORTION'S OF REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION NOT
LATER THAN 120 DAYS AFTER THE CLOSE OF THE REGISTRANT'S
FISCAL YEAR ARE INCORPORATED BY REFERENCE INTO PART III
OF THIS FORM 10-K.
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The undersigned registrant hereby amends the facing page and the
following items: Item 1, Item 7 and Item 8, as set forth in the pages attached
hereto.

This Form 10-K contains certain "forward-looking" statements as such
term is defined in the Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"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. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitation, competitive factors, general
economic conditions, 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 other filings made by the Company with the
Securities and Exchange Commission. 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 herein as anticipated, believed, estimated, expected, or
intended. The Company does not intend to update these forward-looking
statements.

PART I

ITEM 1. BUSINESS

References herein to the "Company" or "Rush Enterprises" mean Rush
Enterprises, Inc., a Texas corporation, its subsidiaries and Associated
Acceptance, Inc., the insurance agency affiliated with the Company, unless the
context requires otherwise.

GENERAL

Founded in 1965, Rush Enterprises operates a regional network of truck centers
that provide an integrated one-stop source for the trucking needs of its
customers, including retail sales of new Peterbilt and used heavy-duty trucks;
after-market 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 Company's truck centers
are strategically located in high truck traffic areas on or near major highways
in Texas, California, Oklahoma, Colorado and Louisiana. The Company is the
largest Peterbilt truck dealer in North America based on unit sales,
representing approximately 14.0% of all new Peterbilt truck sales in 1996, and
is the sole authorized vendor for new Peterbilt trucks and replacement parts in
its market areas. The Company was named Peterbilt Dealer of the Year for North
America for the 1993-1994 year. The criteria used to determine the recipients
of this award include, among others, image, customer satisfaction, sales
activity and profitability.

The Company believes that large, multi-location, full-service dealerships,
which offer a large selection of new and used trucks, parts and sophisticated
service and body shop facilities, are able to realize economies of scale and
have a competitive advantage in the truck sales and services industry. The
Company's growth strategy is to continue the expansion of its existing
facilities, to open new facilities in its existing territories and to acquire
additional Peterbilt dealerships in new territories.

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The Company's executive offices are located at the San Antonio, Texas
truck center at 8810 I.H. 10 East, San Antonio, Texas 78219, and its mailing
address is P. O. Box 34630, San Antonio, Texas 78265-4630. The Company's phone
number is (210) 661-4511.

INDUSTRY OVERVIEW

Heavy-duty trucks are primarily used for over-the-road and off-highway
hauling of general freight and a number of vocational applications, including
the hauling of petroleum, wood products, refuse, construction materials and
other specialty uses. Trucks are purchased for commercial purposes and are
outfitted to perform according to the specifications of the user. Customers
include owner-operators, regional and national fleets, corporations and
government organizations.

Trucks marketed by the Company are typically classified in the Class 8
heavy-duty truck category. Class 8 trucks are constructed on a heavy-duty
chassis, which includes the engine, drive train and operations components and
have a minimum gross vehicle weight ("gvw") rating above 33,000 pounds, with
the typical heavy-duty truck having a gross combined weight ("gcw") of
approximately 80,000 pounds. Industry-wide negotiated sales prices for new
Class 8 heavy-duty trucks generally range from $57,000 to $100,000 and
negotiated sales prices for new Peterbilt trucks generally range from $65,000
to $100,000, depending upon features and component specifications.

Typically, Class 8 trucks are assembled by the manufacturer utilizing
certain components manufactured by other companies, including engines,
transmissions, axles, wheels and other components. As trucks and truck
components have become increasingly complex, including the use of computerized
controls and diagnostic systems, the ability to provide state-of-the-art
service for a wide variety of truck equipment has become a competitive factor
in the industry. Such service requires a significant capital investment in
advanced equipment, parts inventory and a high level of training of service
personnel. Additionally, Environmental Protection Agency ("EPA") and Department
of Transportation ("DOT") regulatory guidelines for service processes,
including body shop, paint work and waste disposal, require sophisticated
operating and testing equipment to ensure compliance with environmental and
safety standards. Differentiation between truck dealers has become less
dependent on pure price competition and is increasingly based on their ability
to offer a wide variety of trucking services. These include the ability to
provide easily accessible, efficient and sophisticated truck service,
replacement parts, the ability to offer financing for truck purchases, leasing
and rental programs and the ability to accept multiple unit trade-ins related
to large fleet purchases.

The United States retail heavy-duty truck industry is highly
fragmented with over 1,700 dealerships nationwide, including 97 Peterbilt
dealerships operating 170 locations. New heavy-duty truck sales historically
have shown a high correlation to the rate of change in industrial production
and gross domestic product. According to data published by R. L. Polk, during
1996 new heavy-duty truck sales in the United States were 184,989 units,
decreasing by 11.0% from the 207,932 units sold in 1995. Since 1991, however,
annual domestic retail heavy-duty truck

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sales have averaged approximately 155,000 units. New Peterbilt truck
registrations during the calendar year ended December 31, 1996 were 20,624, for
a national market share, based on new truck registrations, of 11.1%. In the
Company's seven primary market areas 18,449 new heavy-duty trucks were
registered in 1996, 2,883 of which were new Peterbilts, resulting in an average
market share for Peterbilts of 15.7%.

BUSINESS STRATEGY

The Company's business strategy is to operate an integrated
full-service dealer network marketing Peterbilt heavy-duty trucks and related
services in the Western and Southern regions of the United States. As part of
its business strategy, the Company will seek to expand its existing
dealerships, establish new full-service and parts/service Peterbilt dealerships
in its existing and newly appointed territories and make strategic acquisitions
of additional Peterbilt heavy-duty truck dealers in new territories. The
Company has successfully implemented its business strategy which has resulted
in significant market penetration within both existing and new market areas.
The Company's objective is to continue to build upon this base of operations
and enhance its position as a leading dealer of heavy-duty trucks and related
services by emphasizing the following key elements of its business strategy.

One-Stop Center. The Company has developed its "one-stop truck center"
where customers can purchase new Peterbilt or used heavy-duty trucks, lease and
rent heavy-duty Peterbilt trucks, as well as purchase after-market parts and
accessories and have virtually any kind of truck serviced by factory-certified
technicians, all at one convenient location. Rush truck centers are the sole
authorized vendor for new Peterbilt trucks and replacement parts in their
market areas and have expansive parts departments that display many of the
parts in open showrooms in a mix tailored to local buying patterns and market
trends. As part of its one-stop sales and service strategy, the Company,
through Rush Financial Services, offers third-party financing and insurance
products to assist customers purchasing a new or used truck, as well as truck
leasing and rentals. The Company's truck centers, four of which are open 24
hours a day, six days a week for parts and service, are located on or near
major highways in high truck traffic areas. The continued implementation and
enhancement of its one-stop truck center concept is an integral element of the
Company's business strategy.

Dealership Network. The Company believes it is one of the few
organizations in the heavy-duty truck sales and service industry to operate a
large, multi-state, full-service dealership network in an effort to realize
economies of scale. The Company believes that its expansion and increasing
economies of scale have resulted in superior purchasing power, favorable
financing terms and cost savings from centralized management, which have
enabled the Company to maximize profitability and offer competitive prices to
its customers. In addition, the Company's dealership network and consistency in
service have allowed it to reinforce relationships with fleet customers and
attract those customers traveling throughout the Company's territories by
guaranteeing them competitive and uniform pricing for parts and service at each
of its truck centers. Management believes that this has resulted in continuing
customer relationships. Furthermore, because of its large size, strong
relationships with fleet customers and its ability to

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handle large quantities of used truck trade-ins, the Company, unlike most
dealers, markets and sells to fleets nationwide.

The Company believes that its aggressive expansion program into
California, Oklahoma, Louisiana, and most recently into Colorado, and
diversification into truck-related services, including financial services,
leasing, renting and service and parts, has reduced cyclicality in the
Company's operations due to geographic diversity and reduced reliance on new
and used truck sales. The geographic diversity of the Company's dealer network
has significantly increased the Company's customer base while ameliorating the
effects of certain local and regional economic downswings that more severely
affect single dealership operators. Management believes that the Company's
full-service concept and continued geographic expansion will help to mitigate
the adverse impact on the Company's operations resulting from reduced demand
for new and used heavy-duty trucks and regional economic downturns.

Rush Truck Center Development. The Company has begun to employ a
branding program for its facilities, designating each as a Rush Truck Center
through distinctive signage and uniform marketing programs to enhance its name
recognition and to communicate the standardized high level of quality products
and services throughout its truck center network. The Company believes the Rush
Truck Center strategy will increase its market recognition and encourage its
customers to utilize multiple locations throughout its dealership network.
Currently eight locations are branded Rush Truck Centers and the Company
intends to establish all of its facilities as Rush Truck Centers by December
31, 1997.

Expansion in Existing and New Territories. Since 1990, the Company has
opened five facilities in its existing and new territories. As part of its
expansion strategy, the Company intends to continue to open both full-service
and parts/service truck centers to enhance market coverage in its existing
territories and to enter newly appointed territories. In identifying new areas
for expansion and acquisition, the primary focus of the Company is the market's
historic level of new heavy-duty truck registrations, customer buying trends and
the availability of suitable facilities. By approximately mid 1997 to late 1998,
management plans to open a full-service truck center in the Texas Rio Grande
Valley area, at an approximated cost of $2.0 million, relocate and expand its
existing parts/service facilities in Southern California into a full service
dealership, at an approximated cost of $1.5 million, expand an existing full
service dealership in Southern California, at an approximated cost of $500,000,
relocate and expand its Houston, Texas dealership, at an approximated cost of
$4.0 million, and open leasing locations in Denver, Colorado and San Antonio,
Texas, at an approximated cost of $4.0 million.

The parts/service truck centers offer a variety of product and service
combinations, including parts, rental and leasing services; parts, service and
body shop facilities; and parts only. Management often analyzes the performance
of a parts/service truck center as a factor to determine whether a full-service
facility is warranted in a market area. The Company's truck centers in Lufkin
and Laredo, Texas, and Bossier City, Louisiana, were originally opened as
parts/service facilities and later expanded into full-service dealerships. The
Company also intends to continue to open parts/service facilities in areas of
its territory to maximize market coverage.

PACCAR, Inc., the parent company to Peterbilt, typically evaluates the
management and capitalization of a prospective dealer in determining whether to
grant such prospective dealer

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additional Peterbilt territories. The Company believes that its management and
capitalization allow it to effectively compete for such additional dealership
locations. Although the Company does not have exclusive territories, management
believes that it is unlikely that PACCAR will create additional dealerships in
the market areas in which the Company currently operates. The Company is not
aware of any policies of PACCAR that would limit its ability to continue to
acquire additional Peterbilt dealerships; however, there can be no assurance
that PACCAR will not object to ownership concentration of Peterbilt dealerships
beyond a certain level.

Expansion by Acquisition. The Company has, since 1990, acquired six
full-service and two parts/service truck centers, and its current expansion
plan focuses beyond its existing presence in Texas, California, Louisiana,
Oklahoma and, most recently, Colorado. The Company's operating strategy and
management systems establish a framework for continued acquisitions into the
foreseeable future. Management believes that it can improve the operating
results of acquired dealers as a result of economies of scale, sophisticated
management information systems, purchasing power, merchandising capability and
the introduction of enhanced financial services and products.

In March 1997, the Company purchased the assets of Denver Peterbilt,
Inc., which consisted of two full-service Peterbilt dealerships in Denver and
Greeley, Colorado. The Company believes that the acquisition of such facilities
provides the Company with an immediate market presence in the state of
Colorado. The purchase price was approximately $7.9 million, funded by (i) $6.5
million of cash and (ii) $1.4 million of borrowings under the Company's floor
plan financing arrangement with GMAC to purchased new and used truck and parts
inventory. The Company also entered into an agreement whereby the principal of
Denver Peterbilt, Inc. may receive additional amounts based on future sales of
new Peterbilt trucks at the Colorado locations.

Any prospective acquisition which the Company may be able to negotiate
would require the willingness of PACCAR to accept the Company as a Peterbilt
dealer at such additional retail locations. Although the Company is constantly
evaluating acquisition opportunities, as of the date of this Form 10-K, the
Company does not have any agreements or understandings, written or oral, with
any third party regarding a potential acquisition or business combination.

TRUCK CENTERS

The Company currently operates ten full-service and six parts/service
truck centers in Texas, California, Oklahoma, Louisiana and Colorado. Rush
truck centers are strategically located in high truck traffic areas on or near
major highways. The Company's original dealership opened in Houston, Texas in
1965, and, since 1990, the Company has grown through a combination of
acquisitions and new store openings in its existing and newly-appointed
territories. The Company currently operates three full-service truck centers in
Texas, two in Southern California, two in Oklahoma, one in Louisiana and two in
Colorado.

The full-service truck centers provide an integrated one-stop source
for the trucking needs of its customers, including retail sales of new
Peterbilt and used heavy-duty trucks; parts, service and body shop facilities;
and a wide array of financial products. The Company's six parts/service

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facilities offer a variety of product and service combinations in areas of the
Company's markets to maximize market coverage. Four of the Company's truck
centers are open 24 hours a day, six days a week for parts and services. The
Company's plans include the opening of a full-service truck center in the Texas
Rio Grande Valley area, the relocation and expansion a Southern California
parts/service facility into a full service dealership and the relocation of the
Company's Houston, Texas sales and service facilities.

The full-service truck centers range in size from 13,500 to 73,000
square feet, with from six to 50 service bays, and are situated on lots ranging
from three to 14 acres, while the parts/service facilities range in size from
2,500 to 6,200 square feet, with from six to 25 service bays, and are situated
on lots ranging from 0.4 to five acres. The typical full-service Rush truck
center displays between 10 and 100 new and used trucks, has six to 40 repair
and maintenance service bays, four to 20 body shop bays, one to four paint
bays, an open retail parts showroom ranging from 600 to 2,000 square feet, a
parts warehouse ranging from 3,000 to 20,000 square feet and administrative and
sales offices ranging from 1,000 to 7,000 square feet. Facility characteristics
determined by market needs.

Set forth below is a summary description of each the Company's
facilities:

DATE
OPENED FINANCING
RUSH TRUCK OR STATUS/ TRUCK LEASING AND
CENTER LOCATION ACQUIRED METHOD SALES SERVICE PARTS BODY SHOP AND RENTING INSURANCE
--------------- -------- ------ ----- ------- ----- --------- ----------- ---------

Existing Truck
Centers
San Antonio, TX . . 1968 Start-up O O O O O
Houston, TX(1) . . 1988 Start-up O O
Houston, TX(1) . . 1988 Start-up O O O(2)
Houston, TX(1) . . 1993 Start-up O O O(3)
Houston, TX(1) . . 1993 Start-up O O O
Lufkin, TX . . . . 1991 Start-up O O O O O
Laredo, TX . . . . 1993 Start-up O O O O(4) O
Bossier City, LA . 1994 Start-up O O O O O
Pico Rivera, CA . . 1994 Acquisition O O O O O O
Sun Valley, CA(5) . 1994 Acquisition O
Fontana, CA . . . . 1994 Acquisition O O O O O O
Tulsa, OK . . . . . 1995 Acquisition O O O O O
Oklahoma City, OK . 1995 Acquisition O O O O(6) O
Oklahoma City, OK . 1995 Acquisition O O O
Denver, 1997 Acquisition O O O O O O
CO(7).................
Greeley, 1997 Acquisition O O O O O
CO(7).................
Planned Truck Centers
Rio Grande Valley, 1996-97 Start-up O O O O O
TX . . . . . . . .
Southern CA(5) . . 1997-98 Start-up O O O O
Expanded Facilities
Pico Rivera, 1998 Acquisition O O O O O O
CA(8).................
Houston, 1997 Start-up O O O O O O
TX(1).................
San Antonio, TX(9) 1997 Start-up O

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(1) The Company started a full-service dealership in Houston, Texas in 1965,
which was sold in 1979. The Company reacquired the dealership in 1988.
Currently, the Company is seeking to relocate the dealership, parts and
service, leasing and renting and finance and insurance facilities to a new
location.
(2) Paint shop only.
(3) Operating at another location in Houston from 1988 to 1993.
(4) Trailer repair shop.
(5) The Company currently plans to relocate and expand into a full service
dealership by late 1998.
(6) Body shop under construction to be completed in mid 1997.
(7) The acquisition of the Denver, Colorado and Greeley, Colorado locations
was completed in March 1997. The Company plans to start-up leasing and
rental and finance and insurance operations.
(8) The Company currently plans to expand its existing Pico Rivera, California
dealership.
(9) The Company currently plans to open a leasing and rental operation in San
Antonio, Texas during mid 1997.

TRUCK SALES

New Truck Sales. Rush truck centers sell new trucks which are marketed
under the Peterbilt nameplate primarily in the Class 8 diesel category. The
Company also markets Class 7 Peterbilt trucks (having a gvw rating of 26,001 to
33,000 pounds), Peterbilt refuse chassis and cement mixer chassis, GMC
medium-duty trucks and, at its Oklahoma facilities, Volvo Class 8 heavy-duty
trucks. The Company's new Class 8 Peterbilt trucks, which are manufactured and
supplied to the Company by PACCAR, constitute over 90% of all new trucks sold
by the Company. Peterbilt trucks have a reputation as premium-quality vehicles
which are skillfully designed and driver friendly, and are typically customized
to satisfy the requirements of its customers. Peterbilt's premium reputation is
an important aspect of the Company's marketing of new and used trucks and
management believes that such reputation has resulted in relatively higher
resale prices for used Peterbilt trucks. New heavy-duty truck sales are the
largest segment of the Company's business, accounting for approximately 59% of
total revenues in 1996.

The Company's customers use Peterbilt heavy-duty trucks for
over-the-road and off-highway handling of virtually all materials, including
general freight, petroleum, wood products, refuse and construction materials.
PACCAR purchases major truck components, such as engines, transmissions, tires,
wheels and axles from other manufacturers, pursuant to each customer's
specifications, to assemble its new trucks. The Company sells approximately 75%
of its new heavy-duty trucks according to customer order, and the remaining 25%
are sold out of inventory at its truck centers. It takes between 60 days and
six months for the Company to receive delivery from PACCAR on a new truck order
from the time an order is placed.

A new Peterbilt heavy-duty truck typically ranges in negotiated price
from $65,000 to $100,000, while a typical Class 8 truck ranges in negotiated
price from $57,000 to $100,000. The Company aggressively markets to regional
and national fleets, with approximately 60% of all unit sales to fleet
customers (those that purchase more than five trucks in a single 12-month
period) and the balance of new truck sales to other owner-operators,
corporations and local governments. An important competitive issue for the
Company's customers is driver retention, with a typical fleet averaging in
excess of 100% driver turnover annually. Management believes Peterbilt trucks,
due to their premium reputation and attractiveness to the drivers, are
increasingly being used by major fleets and carriers as incentives to attract
new drivers and retain existing drivers.

The Company has a competitive advantage in that it can absorb
multi-unit trade-ins often associated with fleet sales of new trucks and
disperse the used trucks for resale throughout its

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dealership network. Because of its large size, strong relationships with fleet
customers and its ability to handle large quantities of used truck trade-ins,
the Company, unlike most dealers, markets and sells to fleets nationwide.
Additionally, the Company believes that its attention to customer service and
its broad range of trucking services, including its ability to offer truck
financing and insurance, has resulted in a high level of customer loyalty.
During 1996, approximately 75% of the Company's truck sales were to repeat
customers. The Company sold 2,871 new trucks in 1996 compared with 2,263 in
1995.

Used Truck Sales. The Company sells used heavy-duty trucks of numerous
manufacturers, including Peterbilt, Kenworth, Freightliner, Mack and Navistar.
The Company is well positioned to market used heavy-duty trucks due to its
ability to recondition used trucks for resale utilizing its parts and service
departments and to shift inventory from location to location to satisfy
customer demand. Approximately 85% of the Company's used truck fleet is
comprised of trucks taken as trade-ins by new truck customers to be used as all
or part of the new truck customer's down payment, and the remainder are
purchased from third parties for resale on the Company's retail lots.

The Company's used truck sales staff is trained to evaluate each
prospective used truck on the basis of wholesale value and the costs of
delivery, reconditioning and otherwise making the truck ready for sale. In a
fleet purchase of several new trucks, not all of the trucks traded in will be
suitable for sale on a Rush truck center's retail lot. Trucks that are not
acceptable are typically sold at wholesale. Most used trucks acquired by the
Company require some reconditioning prior to resale. The reconditioning process
generally takes between one and three weeks, depending on the type of services
to be performed. The Company utilizes its on-site parts, service and body shop
facilities to perform such reconditioning services. Unlike new trucks, the
majority of the Company's used trucks are sold "as is" and without
manufacturer's warranty, although manufacturers sometimes provide limited
warranties on used vehicles if they have been reconditioned at a Rush truck
center prior to resale or if the manufacturer's warranty is transferrable and
has not yet expired.

The Company closely monitors the age and quality of its used truck
inventory and transfers such inventory between truck centers in order to
maximize inventory turnover, avoid inventory overstock and understock
situations and satisfy customer demand. The Company sold approximately 1,349
used trucks during 1996 compared with 1,135 in 1995.

FINANCIAL SERVICES

As part of its one-stop sales and service strategy, the Company offers
third-party financing and insurance products to assist customers purchasing a
new or used truck. The Company also offers truck leasing and rentals at five of
its locations. Revenues from financial services were $19.3 million in 1996, or
5.6%, of total revenues.

New and Used Truck Financing. Each new and used truck customer is
directed by the Company's truck sales staff to the Company's financial services
sales personnel. The Company, through Associates, the largest third-party
provider of heavy-duty truck financing in North

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America, and PACCAR Financial, financed approximately $76.4 million of new and
used truck purchases by customers in 1996, an increase of 43.6% from the $53.2
million financed in 1995. The Company is one of the largest originators of
Class 8 heavy-duty truck loans for Associates based on aggregate dollar amount
financed. At times, the Company also acts as a broker, matching truck
purchasers with alternative financing sources in exchange for a fee that is
determined on a case-by-case basis.

During 1996, the Company arranged customer financing for approximately
31% of its total new and used truck sales, with approximately 64% related to
new truck sales and the remaining 36% of financing related to used truck sales.
The financings are typically installment contracts, which are secured by the
trucks financed, and generally require a down payment of 10% to 30%, with the
remaining balance financed over two to five years. The Company presents all of
its financing opportunities in Texas, Oklahoma and Louisiana to Associates and
its financing opportunities in California and Colorado to PACCAR Financial.
Approximately 91% of the principal amount financed by the Company under
installment contracts during 1996 was financed through Associates, with the
remainder financed through PACCAR Financial. The Company's contracts with
Associates and PACCAR Financial provide for payment to the Company of all
finance charges in excess of a negotiated discount rate within 30 days of the
date of financing. Such payments are subject to offsets resulting from the
early pay-off of, or defaults under, installment contracts previously sold to
Associates and PACCAR Financial by the Company. The Company has been able to
negotiate favorable discount rates with Associates and PACCAR Financial because
of its low historical delinquency rate, and, with respect to Associates, the
large volume of trucks financed.

Associates and PACCAR Financial analyze each customer's credit risk
and determine whether they will extend credit and the minimum terms for doing
so. The Company evaluates the standards prescribed by Associates and PACCAR
Financial and determines whether it is agreeable to completing the financing on
such terms. The Company often requires an increased down payment, higher
finance charges or additional collateral in order to complete the financing.
The Company's agreements with Associates and PACCAR Financial limit the
aggregate recourse liability of the Company for defaults under the installment
contracts sold to Associates and PACCAR Financial to $400,000 and $200,000 per
year, respectively. The Company carefully monitors its outstanding installment
contracts and actively communicates with Associates and PACCAR Financial
regarding delinquent accounts. Over the last five years, the default rate on
loans originated by the Company has averaged less than 0.5% per year. The
Company has not in the past experienced significant losses resulting from
defaults on loans, and such losses have historically been significantly less
than the amount of its total recourse liability.

Truck Leasing and Rental. The Company engages in full-service
Peterbilt truck leasing under the PacLease trade name at five of its locations.
Under the terms of a full-service lease, all parts sales, service and
maintenance for the lease or rental trucks is performed at the Company's
facilities. The Company has increased its lease and rental fleet from less than
100 trucks in 1993 to approximately 559 trucks at December 31, 1996. The
Company owns approximately 11.0% of its lease and rental fleet, and
approximately 89.0% of the fleet is leased from PACCAR. The Company was named
PacLease Western Region Franchise of the Year in 1995 and Midwest Region
Franchise of the Year in 1996. The criteria used to determine the recipients of
this award include, among others, image, customer satisfaction, rental
utilization and profitablilty.

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The Company offers both long-term leasing and short-term rentals to
its customers. Approximately 80% of the Company's fleet is leased to customers
for periods ranging from two to five years, and the remainder of the trucks are
rented or leased for periods ranging from one day to two years. The Company
generally holds trucks in its lease and rental fleet for approximately five
years and then typically sells such used trucks through its truck centers. The
Company has consistently realized gains on the sale of such trucks in excess of
lease purchase option values. The Company constantly monitors the age of its
lease and rental fleet, and as trucks are taken out of the fleet, the Company
adds new trucks as needed. The average age of trucks in the Company's lease and
rental fleet is 32 months. The Company's lease and rental customers provide a
market to support the Company's parts and service operations by creating
additional parts sales and service work for the Company. The Company also
receives a rebate from PACCAR for each Peterbilt truck purchased for use in its
lease fleet.

Insurance Agency Services. The Company sells a complete line of
property and casualty insurance, including collision and liability insurance on
trucks, cargo insurance, standard automobile liability coverages, life, credit
life and health, workers' compensation coverages and homeowner's insurance. The
Company's agents are licensed in 25 states to sell insurance for various
insurance companies, including Associates Insurance and Motors Insurance
Corporation, which underwrite the products offered by the Company. While the
Company sells a majority of its insurance products to its truck-purchasing
customers, the Company also sells to the general public. The Company believes
it has developed good relationships with its insurance-purchasing customers
which resulted in an average renewal rate of 86% during 1996.

The Company provides insurance premium financing to its insurance
customers. Lending operations are supported by the Company's insurance
subsidiary's own capital base. Premiums for property and casualty insurance are
typically payable at the time a policy is placed in force or renewed. The
Company's premium financing services allow the insured to pay a portion of the
premium when the policy is placed in force and the balance in monthly
installments substantially over the life of the policy. As security, the
Company retains a contractual right to cancel the insurance policy if a premium
installment is not paid when due. In the event of such cancellation, the
Company applies the unearned premium toward the payment obligation of the
insured. Premium financing which the Company offers to its customers does not
involve any credit risk since no funds are advanced to outside parties and the
Company is fully secured by the unearned premiums on the financed policies.

PARTS, SERVICE AND BODY SHOP OPERATIONS

The parts, service and body shop operations of the Company provide
relatively higher profit margins and tend to be less cyclical than new and used
truck sales. Parts, service and body shop revenues accounted for approximately
$64.5 million, or 18.7%, of the Company's total revenues in 1996.

Parts. Each Rush truck center carries a wide variety of Peterbilt and
other parts inventory, with an average of approximately 4,500 items from over
30 suppliers at each location. The Company is the sole authorized Peterbilt
parts and accessories supplier in each of its markets and

12
estimates that approximately 80% of its service and parts functions are
performed on Peterbilt heavy-duty trucks.

The parts departments support the Company's sales and service
functions. The Company utilizes its parts department when performing its
repair, maintenance and body shop services, including all parts required to
recondition used trucks for resale and maintain and repair the Company's lease
fleet. In addition to supporting the Company's service and body shop functions,
the Company markets its parts and accessories both at its truck centers and
through its outside sales staff. The Company's outside sales staff markets
parts directly to fleet customers, who often perform truck maintenance and
repairs at their own in-house service facilities.

The Company's real-time inventory management tracking system reduces
delays in parts delivery, helps maximize inventory turns and assists in
controlling the potential of overstock and understock situations. The Company's
inventory system also assists management in determining the appropriate parts
inventory mix in each location and tailoring such inventory to local buying
patterns and market trends, while monitoring product mix to optimize pricing
and maximize profit margins. The Company's automated reordering system assists
each truck center in maintaining the proper inventory levels and permits
inventory delivery to each location, or directly to customers, typically within
24 hours from the time the order is placed. The Company provides the standard
manufacturer's warranty on the parts that it sells, which is generally a 90-day
to one-year replacement guarantee.

The Company displays many of its higher margin parts and accessory
items in open showrooms. Open parts showrooms are typically 600 to 2,000 square
feet and feature up to 1,000 parts items and accessories in a mix tailored to
local buying patterns and market trends. In order to maximize turnover, open
parts showrooms are located near driver lounges and other high traffic areas of
its truck centers. The Company encourages qualified customers to open accounts
for parts purchases.

Service and Body Shop. Rush truck centers feature various combinations
of fully equipped service and body shop facilities capable of handling almost
any type of truck repair on virtually any type of truck, from rebuilding entire
trucks and engines to routine maintenance functions, including tune-ups, oil
changes, tire balancing, front-end alignments and inspections. Rush truck
centers offer such services in a relaxed and accommodating atmosphere. Most
Rush truck centers have driver lounges equipped with televisions, recliners,
sofas, phones and food and beverage machines to allow drivers to sleep, relax
or conduct business while waiting for service to be performed. To simplify the
buying process, the Rush truck centers offer "menu" pricing of service and body
shop functions and offer expedited service at a premium price for certain
routine repair and maintenance functions.

The Company has a total of 266 service bays, including 11 paint bays,
throughout its network. The Company performs both warranty and non-warranty
service work, with the cost of the warranty work being reimbursed by the
manufacturer at retail consumer rates. The Company estimates that approximately
20% of its service functions are performed under manufacturers' warranties.
Rush truck centers are Peterbilt designated warranty service centers and most
are

13
authorized service centers for a number of manufacturers of heavy-duty truck
components, including Cummins, Detroit Diesel, Caterpillar, Eaton and Rockwell.
Manufacturers permit warranty work to be performed only at designated warranty
service centers. To enhance accuracy and timeliness in payment of warranty
claims, the Company maintains a computerized system for sending warranty claims
to PACCAR and various other manufacturers.

The Company's service and body shop facilities, four of which are open
24 hours a day, six days a week, are equipped with state-of-the-art tools and
diagnostic equipment and staffed by manufacturer-trained and certified service
technicians. The Company's service technicians perform full-service truck
repairs and make-ready on Peterbilt and virtually any other type of heavy-duty
truck. Rush truck centers' factory-certified service employees regularly attend
manufacturer-sponsored training programs to remain abreast of current
diagnostic and repair and maintenance techniques. The Company employs an
innovative compensation program for its service technicians designed to
encourage the performance of expedited and high quality repair and maintenance
services. Rather than paying service technicians on an hourly basis, each
technician receives a flat rate for each service or repair performed. If a
service or repair is performed incorrectly, the technician making the initial
repair or service must correct the situation without additional compensation.
This compensation arrangement facilitates the retention of efficient service
technicians who can increase their compensation by expeditiously and accurately
completing service and repairs.

The Company's body shops, which include multiple EPA approved paint
bays, are fully equipped to make virtually any type of truck body repair, from
complete reconstruction of truck frames damaged in accidents to repairs and
replacements of hoods, body panels and fenders. Rush truck centers' body shops
are also used to refurbish trucks in need of updating due to changes in
industry standards or to satisfy regulatory guidelines.

SALES AND MARKETING

The Company's aggressive expansion program and long history of
operations have resulted in a customer base that is diverse in terms of
geography, industry and scale of operations. The Company's customers include
owner-operators, regional and national fleets, corporations and local
governments, none of which accounted for more than 7% of its total sales in
1996. Because of its large size, strong relationships with fleet customers and
its ability to handle large quantities of used truck trade-ins, the Company,
unlike most dealers, markets and sells to fleets nationwide. Management also
believes that the consistently reliable service received by customers at each
Rush truck center and the Company's longevity have resulted in increased
recognition of the "Rush" name, customer loyalty and continuing customer
relationships. During 1996, approximately 75% of the Company's truck sales were
to repeat customers.

The Company believes that large, multi-location, full-service
dealerships, which offer a large selection of new and used trucks, parts and
sophisticated service and body shop facilities, are able to realize economies
of scale and have a competitive advantage in the truck sales and services
industry. As part of its strategy, the Company has begun to employ a Rush Truck
Center branding program for its facilities to enhance the Company's name
recognition and to communicate the

14
standardized high level of quality products and services throughout its truck
center network. The Company intends to brand each of its facilities as a Rush
Truck Center through distinctive signage and uniform marketing programs.
Currently eight locations are branded as Rush Truck Centers and the Company
intends to establish all of its facilities as Rush Truck Centers by December
31, 1997.

The Company generally promotes its trucks and related services through
its sales staff, trade magazine advertisements and attendance at industry
shows, including the International Truck Show and the Southwest Trucking Show.
In addition to cultivating walk-in customers, the Company's sales staff also
makes customer visits and participates in organizations that support industries
that utilize the Company's trucks. The Company uses its proprietary direct mail
database to distribute its bi-monthly truck magazine, which includes new and
used truck and parts specials, and other marketing materials to over 50,000
existing and potential customers. Support of the industry is achieved through
membership and support of trucking organizations, such as the American Truck
Dealers and American Trucking Association. In addition, the Company has a
world-wide web site on the Internet featuring truck and parts specials at
http://www.rushtruckcenters.com.

The Company's new truck sales staff consists of 85 employees,
including a Senior Vice President of Sales and Marketing and seven regional
sales managers. Used trucks are sold through 17 used truck sales personnel,
including a Vice President of Used Trucks and five regional sales managers. The
sales staff at each Rush truck center receives sales training, instruction on
technical and operating aspects of the trucks and education with respect to the
industries in which such trucks are utilized, including the waste-disposal,
construction and forestry industries. The sales staff of each Rush truck center
is compensated on a commission and salary basis, with a high percentage of
compensation based on commission.

The Company has approximately 110 parts and service sales employees,
including a Vice President of Parts and Service, one national parts director,
one national service director, one national parts and service marketing
director, 15 regional service managers and 10 regional parts managers. The
Company sells parts in conveniently located open showrooms and parts counters
at its truck centers and directly to fleet customers through its outside sales
staff. The direct marketing to its fleet customers is intended to position the
Company as the primary supplier of parts to such customers, who often perform
truck maintenance and repairs at their own in-house service facilities.

15
FACILITY MANAGEMENT

Personnel. Each Rush truck center is managed by a general manager who
oversees the operations, personnel and the financial performance of the
location, subject to the direction of the Company's corporate office. Each Rush
truck center is also typically staffed by a sales manager, parts manager,
service manager, sales representatives, parts employees, and other service and
make-ready employees. The sales staff of each Rush truck center is compensated
on a salary plus commission basis, with a high percentage of compensation based
on commission, while the general manager, parts manager and service manager
receive a combination of salary and performance bonus, with a high percentage
of compensation based on the performance bonus. The Company believes that its
employees are among the highest paid in the truck sales industry.

General managers annually prepare detailed monthly forecasts and
monthly profit and loss statements based upon historical information and
projected trends and an element of each general manager's compensation is
determined by meeting or exceeding these operating plans. During the year,
general managers regularly review their Rush truck center's progress with
senior management and make appropriate adjustments as needed. All employees of
the Company undergo annual performance evaluations.

The Company has been successful in retaining its senior management,
general managers and other employees. The average tenure of the Company's
current senior management is 14 years, and the average tenure of its current
truck centers general managers is approximately 10 years with the Company. To
promote communication and efficiency in operating standards, general managers
and members of senior management attend several Company-wide strategy sessions
per year. In addition, management personnel attend various industry-sponsored
leadership and management seminars and receive continuing education on
Peterbilt products, marketing strategies and management information systems.

Members of senior management regularly travel to each location to
provide on-site management and support. Each location is audited twice a year
for administrative record-keeping, human resources and environmental compliance
matters. The Company has instituted succession planning pursuant to which
employees in each truck center are groomed as assistant managers to assume
management responsibilities in existing and future dealerships.

Purchasing and Suppliers. The Company believes that pricing is an
important element of its marketing strategy. Because of its size, the Company
benefits from volume purchases at favorable prices that permit it to achieve a
competitive pricing position in the industry. The Company purchases its
Peterbilt heavy-duty truck inventory and Peterbilt parts and accessories
directly from PACCAR. All other manufacturers' parts and accessories, including
those of Cummins, Detroit Diesel, Caterpillar and others are purchased through
wholesale vendors or from PACCAR, who buys such products in bulk for resale to
the Company and other Peterbilt dealers. All purchasing, volume and pricing
levels and commitments are negotiated by the Company's corporate headquarters.
The Company has been able to negotiate favorable terms, which facilitates the
Company's ability to offer competitive prices for its products.

16
Management Information Systems. Each Rush truck center maintains a
centralized real-time inventory tracking system which is accessible
simultaneously by all locations and by the Company's corporate office. The
Company utilizes the information assimilated from its management information
systems to determine and monitor the appropriate inventory level at each
facility. From this information, management has developed a model reflecting
historic sales levels of different product lines. This information identifies
the appropriate level and mix of inventory and forms the basis of the Company's
operating plan. The Company's management information systems and databases are
also used to monitor market conditions, sales information and assess product
and expansion strategies. Information received from state and regulatory
agencies, manufacturers and industry contacts allows the Company to determine
market share statistics and gross volume sales numbers for its products as well
as those of competitors. This information impacts ongoing operations by
allowing the Company to remain abreast of changes within the market and allows
management to react accordingly by realigning product lines and by adding new
product lines and models.

Distribution and Inventory Management. The Company utilizes its
real-time inventory management tracking system to maintain a close link between
each truck center. This link allows for a timely and cost-effective sharing of
managerial and sales information as well as the prompt transfer of inventory
among various locations. The transfer of inventory reduces delays in delivery,
helps maximize inventory turns and assists in controlling problems created by
overstock and understock situations. The Company is linked directly to its
major suppliers, including PACCAR and GMC, via real-time satellite
communication links for purposes of ordering and inventory management. These
automated reordering and satellite communication systems allow the Company to
maintain proper inventory levels and permit the Company to have inventory
delivered to its locations, or directly to customers, typically within 24 hours
of an order being placed.

RECENT ACQUISITIONS

COMPETITION

There is significant competition both within the markets currently
being served by the Company and in new markets into which the Company may
enter. Dealer competition continues to increase based on accessibility of
dealership location, the number of the Company's dealership locations, price,
value, quality and design of the product as well as attention to customer
service (including technical service). The Company believes that it is
competitive in all of these

17
categories. Despite being what the Company believes to be one of the largest
dealers in the industry in terms of total revenues, during 1996 the Company
accounted for approximately 1.6% of all new Class 8 truck sales in North
America.

The Company's products compete with Class 8 and Class 7 trucks made by
other manufacturers and sold through competing independent and factory-owned
truck dealerships, including trucks manufactured by Navistar (International),
Mack, Freightliner, Volvo, Ford, Western Star, other Class 8 trucks
manufactured by PACCAR (Kenworth) and other manufacturers. Management believes
it is able to effectively compete with dealerships and service providers on the
basis of overall Peterbilt product quality, reputation and name recognition as
well as its ability to provide full parts and service support, financing and
insurance and other customer services, at easily accessible locations in high
truck traffic areas on or near major highways.

DEALERSHIP AGREEMENTS

PACCAR. The Company has entered into non-exclusive dealership
agreements (the "Dealership Agreements") with PACCAR with respect to each of
the Company's territories. The Dealership Agreements each have current terms
expiring between April 1997 and March 2000 and may be terminated by PACCAR upon
a violation by the Company of the provisions contained therein. Upon the
expiration of the term of the Dealership Agreements, written renewals of such
agreements must be executed by PACCAR. Any termination or non-renewal of the
Dealership Agreements must be done by PACCAR in accordance with both state and
federal legislation designed to protect dealers from arbitrary termination or
non-renewal of franchise agreements. The Automobile Dealers Day in Court Act
and applicable state laws provide that termination or non-renewal of a
dealership agreement must be done in "good faith" and upon a showing of "good
cause" by the manufacturer for such termination or non-renewal, as those terms
have been defined by statute and case law. The Company has consistently had its
Dealership Agreements renewed and the Company anticipates obtaining renewals in
the future. However, no assurances can be given that such renewals will be
obtained.

The Company is not required to pay a royalty fee under the Dealership
Agreements. Rather, the Company has agreed to stock, sell at retail and service
Peterbilt trucks and products in its defined market areas. Pursuant to the
terms of the Dealership Agreements, the Company is entitled to use the
"Peterbilt" name, trade symbols and intellectual property. PACCAR periodically
furnishes the Company general and specialized truck and parts sales and other
service and technical training programs and makes available to the Company
copies of service manuals and bulletins, publications and technical data to
assist in the effective operation of the Company's services and parts
operations. PACCAR also makes available field personnel who periodically advise
the Company on sales, parts and service related subjects, including fleet
sales, product quality, technical adjustments, repair, replacement and sale of
products, customer relations, warranty administration, and service and parts
merchandising, training and management. PACCAR maintains general advertising
and promotion programs for the sale of Peterbilt products.

18
Each of the Company's dealerships is required to establish and
maintain a ratio of net working capital to total assets ranging from .05 to .25
as provided in its Dealership Agreement. If at any time a dealership's net
working capital falls below the minimum requirements as determined from time to
time by PACCAR, the dealership is required to take steps reasonably necessary
to meet such minimum capital requirements. The Company has had no problem in
the past satisfying such minimum capitalization requirements and does not
anticipate any problems through fiscal 1997. The Dealership Agreements also
require the Company to maintain a uniform accounting system designated by
PACCAR and provide PACCAR with monthly financial and operating data.

The Company is required to provide 60 days' prior written notice to
PACCAR before it enters into a written agreement to sell and service the
competitive vehicles of another truck manufacturer. The purpose of the notice
is to provide PACCAR with an opportunity to evaluate and discuss with the
Company the likely effect of such an action on the Company, PACCAR and the
other Peterbilt dealers.

In the event of a change of control of the Company, the Dealership
Agreement may be immediately terminated by PACCAR. For this purpose, a change
of control occurs (i) if the Dealer Principals (W. Marvin Rush, W. M. "Rusty"
Rush, Robin M. Rush and other executives of the Company) in the aggregate own
less than 30% of the capital stock entitled to vote on the election of
directors of the Company, or (ii) if any "person" (as that term is defined
under the Securities Exchange Act of 1934, as amended) other than the Dealer
Principals or any person who has been approved in writing by PACCAR, either (x)
owns a greater percentage of the capital stock entitled to vote on the election
of directors of the Company than the Dealer Principals in the aggregate, or (y)
holds the office of Chairman of the Board, President or Chief Executive Officer
of the Company. In the event that the Company were to find it necessary or
advisable to sell any of its Peterbilt dealership locations, PACCAR retains the
right of first refusal to purchase such dealership location in any proposed
sale. The change of control and right of first refusal provisions may have
anti-takeover effects.

The Company believes that the termination of its dealership agreements
with PACCAR would have a material adverse effect on its business, financial
condition and results of operation.

In addition to its dealership agreements with PACCAR, the Company is
also an authorized dealer for Volvo GM Heavy Truck Corporation ("Volvo") and
General Motors Corporation ("GMC") at certain of the Company's locations.

Volvo. The Company is an authorized, exclusive retail dealer of new
Volvo trucks and parts at its Oklahoma City and Tulsa, Oklahoma facilities. As
part of the dealership agreement with Volvo (the "Volvo Agreement"), the
Company is granted the right to use various Volvo trademarks in the conduct of
its business and the benefit of Volvo materials and training. In order to
remain in compliance with the terms of the Volvo Agreement, the Company must
meet certain sales, service and facilities criteria established by Volvo,
provide Volvo with various financial and planning documents on a regular basis
and provide warranty repairs on covered Volvo trucks.

The Volvo Agreement is effective through March 31, 2000 and is renewed
annually unless terminated according to the provisions of the Volvo Agreement.
The occurrence of any of the following events constitutes grounds for
termination by Volvo: (a) ownership of a majority of the capital stock of the
Company by persons other than W. Marvin Rush and members of his family;

19
(b) disputes among, or actions by, the Controlling Individuals which may
adversely affect the reputation of Volvo; (c) the sale by the Company of any of
its principal operating assets; (d) the sale or transfer of the Volvo Agreement
to an unauthorized party; and (e) the occurrence of various other material
breaches enumerated in the Volvo Agreement which are typical of dealership
agreements.

The Company believes that the termination of the Volvo Agreement will
not have a material adverse effect on its business, financial condition or
results of operations.

GMC. Under the Company's non-exclusive dealership Agreement with GMC
(the "GMC Agreement"), GMC provides the Company with, among other things,
trucks, parts and training in the sales and service of GMC medium-duty trucks.
GMC also allows the Company to use various GMC licenses, trade symbols and
intellectual property owned by GMC. The Company is obligated to conform its
operations to the standards established by the GMC Agreement and ongoing
reviews of the Company's facilities and operations. The obligations of the
Company include maintaining minimum size and appearance standards for its
dealership facilities, maintaining its accounting records in conformance with
GMC standards, performing GMC warranty repairs and responsibly promoting the
sale and service of GMC products throughout the Company's assigned territory.

The GMC Agreement is effective through October 31, 2000 and may be
terminated by GMC in specific circumstances. The GMC Agreement is based on the
personal relationship between GMC and the Dealer Operators (W. Marvin Rush, W.
M. "Rusty" Rush and Robin M. Rush) and prohibits any attempted assignment,
including upon the death or incapacity of one or more of the Dealer Operators,
of the GMC Agreement to a third party which is not expressly approved by GMC.
With regard to any proposed assignment of the GMC Agreement, GMC retains a
right of first refusal on any offers to purchase the GMC Agreement. The Company
is also prohibited from making any transfer of more than a ten percent equity
interest in the Company without the consent of GMC. Some of the additional
grounds upon which GMC may terminate the GMC Agreement are: (a) material
conflicts with GMC over the Company's facilities and operations; (b) misconduct
by the Company or the Dealer Operators; or (c) failure to maintain the
specified net capital requirement and an open line of credit pursuant to the
terms of the GMC Agreement. The Company has remained in compliance with the
terms of the GMC Agreement and anticipates no conflicts through 1997.

The Company believes that the change of ownership resulting from its
initial public offering completed in June 1996 violated the GMC Agreement and
that such agreements is terminable by GMC. The termination of the GMC Agreement
would not have a material adverse impact on the Company.

FLOOR PLAN FINANCING

20
repayments on new vehicles to GMAC for a period of 12 months and for used
vehicles for a period of three months. The loan is collateralized by a lien on
the vehicle. The Company's floor plan agreements with its primary lender limit
the aggregate amount of borrowings based on the number of new and used trucks.
As of December 31, 1996, the Company's floor plan arrangements permit the
financing of up to 888 new trucks and 349 used trucks. At December 31, 1996,
the Company had $42.2 million outstanding under its floor plan financing
arrangement with GMAC. GMAC permits the Company to earn interest at the prime
rate on overnight funds deposited by the Company with GMAC for up to one-half
of the amount borrowed under its floor plan financing, real estate financing
and revolving credit arrangements with GMAC. GMAC has indicated that it will
continue to provide GMAC financing to the Company in the absence of a franchise
agreement with GMC.

PRODUCT WARRANTY

PACCAR provides retail purchasers of new trucks with a limited
warranty against defects in materials and workmanship, excluding certain
specified components which are separately warranted by component suppliers. The
Company does not otherwise provide any warranty to retail purchasers of new
trucks.

The Company generally sells its used trucks "as is" and without
manufacturer's warranty, although manufacturers sometimes provide limited
warranties on used vehicles if they have been reconditioned at the Rush truck
center prior to resale or if the manufacturer's warranty is transferrable and
has not yet expired. The customer does not receive any warranty from the
Company.

BACKLOG

At December 31, 1996, the Company's backlog of orders was
approximately $80.0 million, compared to $90.0 million at December 31, 1995.
The Company includes in backlog only confirmed orders. It takes between 60 days
and six months for the Company to receive delivery from PACCAR once an order is
placed. The Company expects to fill at least 90% of these orders by the end of
1997. The Company sells approximately 75% of its new heavy-duty trucks by
customer special order, with the remainder sold out of inventory. Included in
the Company's backlog as of December 31, 1996 are orders from a number of the
Company's major fleet customers.

REGULATION

The Company is subject to the National Traffic and Motor Vehicle
Safety Act (the "Act"), Federal Motor Vehicle Safety Standards promulgated by
the DOT and various state motor vehicle regulatory agencies. The Company
believes that it is in compliance with the Act and applicable standards.

The Company's service and body shop facilities are subject to federal,
state and local laws and regulations concerning environmental matters with
respect to air quality and discharges into the

21
environment, as well as storage, shipping, disposing and manifesting of
hazardous materials and hazardous and non- hazardous waste. These environmental
matters are associated with the repair and maintenance of heavy-duty trucks at
the Company's facilities, and no location or operation exceeds small quantity
generation status. In addition, these laws and regulations affect the storing,
dispensing and discharge of petroleum-based products and other waste, and
require the Company to secure permits in connection with its dealership
operations. The securing of permits and compliance with all laws and
regulations can be costly and could, in the future, affect the Company's
earnings; however, to date, the cost of permitting and compliance has not been
material. Further, each dealership must comply with local governmental
requirements concerning zoning, land use and environmental factors. Although
the Company has not experienced difficulties in obtaining the required
licensing or approvals, difficulties in obtaining such licensing or approvals
in the future could result in delays in the opening of proposed new
dealerships. State and local laws and regulations also require each dealership
to obtain licenses to operate as a dealer in heavy-duty vehicles. The Company
has obtained all necessary licenses and permits, and management believes the
Company is in full compliance with all federal, state and local laws and
regulations.

The Company's insurance and financing services are subject to the laws
and regulations of the states in which it conducts business. These laws and
regulations cover all aspects of the Company's insurance and financing
business, including, with respect to insurance, licensing, regulation of
insurance premiums financing rates and insurance agency legislation pertaining
to insurance agencies and their affiliates; and with respect to financing,
commercial finance regulations that in some states may be similar to certain
consumer finance regulations, including those governing interest rates and
charges, maximum amounts and maturities of credit and disclosure to debtor of
certain terms of each transaction.

The Company is also subject to the regulations promulgated by the
Occupational Safety and Health Administration ("OSHA"), which regulates
workplace health and safety. The Company's facilities are periodically
inspected by representatives of OSHA.

TRADEMARKS

The Peterbilt, Volvo and GMC trademarks and trade names, which are
licensed from each of the respective corporations, are recognized
internationally and play an important role in the marketing of the Company's
products. Each corporation engages in a continuous program of trademark and
trade name protection in all marketing areas. The Company does not hold any
registered trade or service marks at this time, but has trademark applications
pending with the U. S. Patent and Trademark Office for the name "Rush."

PRODUCT LIABILITY

Products that have been or may be sold by the Company may expose it to
potential liabilities for personal injury or property damage claims relating to
the use of such products. Historically, product liability claims have not been
material to the Company. While the Company maintains third-party product
liability insurance which it believes to be adequate, there can be no assurance

22
that the Company will not experience legal claims in excess of its insurance
coverage, or claims which are ultimately not covered by insurance. Furthermore,
if any significant claims are made against the Company or PACCAR, the Company's
business may be adversely affected by related negative publicity.

EMPLOYEES

At December 31, 1996, the Company employed approximately 700 people,
of which 85 were involved in new truck sales, 17 in used truck sales, 419 in
parts, service and body shop services, nine in insurance agency services, five
in financing services, 85 in truck leasing and rental operations and 80 in
administrative, management and corporate functions.

The Company has no contracts or collective bargaining agreements with
labor unions and has never experienced work stoppages. The Company considers
its relations with employees to be satisfactory.

22
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Certain statements contained in this Form 10-K, including statements
regarding the anticipated development and expansion of the Company's business,
expenditures, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as
such term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, those discussed in other filings made by the Company with the
Securities and Exchange Commission.

Rush Enterprises operates a regional network of truck centers that
provide an integrated one-stop source for the trucking needs of its customers,
including retail sales of new Peterbilt and used heavy-duty trucks; 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.

In February 1994, the Company consummated the purchase of the assets
of Engs Motor Truck Company ("Engs"), which consisted of three full-service
Peterbilt dealerships located in Pico Rivera, Fontana and Ventura, California,
and a parts store located in Sun Valley, California. As part of the Company's
acquisition strategy, the Company closed the Ventura facility in August 1994,
consolidating its operations into the remaining facilities. The purchase price
was approximately $9.6 million, funded by (i) $3.1 million of cash, (ii) $5.4
million of borrowings under the Company's floor plan financing with GMAC to
purchase new and used truck inventory, and (iii) $984,000 payable pursuant to a
note to the seller. In June 1994 the Company purchased the related leasing and
truck rental operations of Engs for $300,000 in cash. In addition, the Company
entered into a five year consulting agreement with two principals of the seller
under which they are paid an aggregate of $12,500 per month. One of the former
employees of Engs became a 10% partner in the acquired business, and the
Company subsequently purchased this interest in August 1995 for cash
consideration of approximately $435,000.

In March 1995, the Company sold an automobile dealership in San
Antonio, Texas, for cash of approximately $3.6 million.

23
24

In December 1995, the Company acquired the assets of Kerr
Consolidated, Inc., which consisted of a full-service Peterbilt dealership and
stand-alone leasing facility in Oklahoma City, Oklahoma, and a full-service
Peterbilt dealership in Tulsa, Oklahoma. The purchase price was approximately
$10.2 million, funded by (i) $2.7 million of cash, (ii) $3.9 million of
borrowings under the Company's floor plan financing with GMAC to purchase new
and used truck and parts inventory, (iii) a $750,000 interest-free advance
against future accounts receivable from Interstate Billing Services, Inc. and
(iv) $2.8 million payable pursuant to a note to the seller. The Company also
agreed to pay the principals of Kerr an aggregate consulting fee of $2,225 per
month for five years from the effective date of this offering.

RESULTS OF OPERATIONS

The following discussion and analysis includes the Company's historical results
of operations for 1994, 1995, 1996.

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

YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
-------- -------- --------

New and used truck sales . . . . . . . . . . . . . . . . . . . . . . 71.3% 73.7% 75.3%
Parts and service . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1 20.4 18.8
Lease and rental . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 3.8 3.9
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . 1.9 1.5 1.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.5 0.4
--- --- ---
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . 83.6 83.7 84.1
---- ---- ----
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.4 16.3 15.9
Selling, general and administrative expenses . . . . . . . . . . . . 12.8 11.9 11.8
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 0.8 0.7 0.7
--- --- ---
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 3.6 3.4
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.0 0.9
--- --- ---
Income from continuing operations . . . . . . . . . . . . . . . . . . 1.8% 2.6% 2.5%
==== ==== ====

24
25

FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER
31, 1995.

Revenues

Revenues increased by approximately $82.0 million, or 31.4%, from
$261.6 million to $343.7 million from 1995 to 1996. This increase was
attributable to gains achieved from each of the Company's revenue categories,
with approximately $61.5 million resulting from the acquisition of the Company's
Oklahoma facilities in December 1995.

Sales of new and used trucks increased by approximately $65.7 million,
or 34.0%, from $192.9 million to $258.6 million from 1995 to 1996. Unit sales
of new and used trucks increased by 26.9% and 18.9%, respectively. The average
selling price of new trucks increased by 5.0% while used truck average selling
prices increased by 15.9%. Approximately $48.7 million of such increase is
attributable to the acquisition of the Oklahoma facilities in December 1995,
with the remainder resulting from increased activity at the Company's other
locations. New truck and used truck prices increased due to product mix and
increased market demand.

Parts and service sales increased by approximately $11.1 million, or
20.9%, from $53.4 million to $64.5 million from 1995 to 1996, with the
inclusion of the Oklahoma operations accounting for approximately $9.6 million
of the increase.

Lease and rental revenues increased by approximately $3.4 million, or
33.5%, from $10.1 million to $13.4 million from 1995 to 1996, with
approximately $2.4 million resulting from the acquisition of the Company's
Oklahoma facilities in December 1995.

Finance and insurance revenues increased by approximately $1.9
million, or 47.1%, from $4.0 million to $5.9 million from 1995 to 1996, with
approximately $800,000 in growth resulting from the acquisition of the
Company's Oklahoma operations in December 1995 and the remaining $1.1 million
resulting from growth in the Company's existing operations.

Gross Profit

Gross profit increased by approximately $11.9 million, or 28.1%, from
$42.6 million to $54.5 million from 1995 to 1996, primarily due to the increase
in revenues from the acquisition of the Oklahoma operations discussed above.
Gross profit as a percentage of sales decreased slightly from 16.3% during 1995
to 15.9% during 1996. The decrease in gross margins was due to a 1% decrease in
gross profit on the sale of new and used trucks, which was offset by a 1.8%
increase in gross margins on parts and service sales and increased spreads on
customer financings due to improved financing terms. The company believes that
its increase in gross margins on parts and service activities was in part the
result of integration of distribution and inventory management information
systems in the Company's Oklahoma operations in December 1995 and in its
California operations in April 1996.

25
26

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by
approximately $9.3 million, or 29.8%, from $31.2 million to $40.6 million from
1995 to 1996, primarily as a result of expenses associated with the Oklahoma
operations. The balance of the increase resulted from variable expense
increases associated with higher revenues. As a percentage of revenues,
selling, general and administrative expenses decreased from 11.9% to 11.8%,
respectively, primarily due to the spreading of fixed costs over a larger base
of sales.

Interest Expense, Net

Net interest expense increased by approximately $167,000, or 5.8%,
from approximately $2.9 million to $3.1 million, from 1995 to 1996,
respectively, primarily as a result of increased levels of floor plan financing
associated with increased sales and higher inventory levels during 1996, and
the acquisition of the Company's Oklahoma facilities in December 1995, offset
by proceeds from the Company's initial public offering.

Income from Continuing Operations

Income from continuing operations increased by $2.1 million, or 31.9%, from
$6.4 million to $8.5 million, from 1995 to 1996, as a result of the factors
described above

Income Taxes

As a result of the Company's initial public offering and termination of its
subchapter S tax status, the Company incurred $2.3 million in income taxes from
the period of the initial public offering to December 31, 1996. The company has
provided for taxes at a 38% effective rate.

FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER
31, 1994.

Revenues

Revenues increased by approximately $60.4 million, or 30.0%, from
$201.3 million to $261.6 million from 1994 to 1995. This increase was
attributable to gains achieved by each of the Company's revenue categories.
Approximately one- half of the increase from 1994 to 1995 is due to the
inclusion in 1995 of a full year's results of the Company's California
dealership operations which were acquired in February 1994. Increased activity
at the Company's San Antonio dealership was the next largest contributor to
revenue growth, while the balance of the improvement came throughout all other
operating locations.

Sales of new and used trucks increased by approximately $49.4 million,
or 34.4%, from $143.6 million to $192.9 million from 1994 to 1995. Unit sales
of new and used trucks increased by 32.3% and 27.7%, respectively, during 1995.
While prices of new trucks remained unchanged during 1995, used truck prices
increased by 16.6%. Unit increases were attributable to the factors discussed
above, while price increases resulted from increased market demand.

26
27

Parts and service sales increased by approximately $6.9 million, or
14.8, from $46.5 million to $53.4 million primarily as the result of the
factors discussed above plus the addition of 18 service and body shop bays at
the Company's facilities in San Antonio, Texas (10), Lufkin, Texas (6) and
Fontana, California (2). Pricing information and decisions improved following
the implementation of the Company's new management information systems
installed in 1994.

Lease and rental revenues increased by approximately $4.6 million, or
83.7%, from $5.5 million to $10.1 million, primarily as the result of (i) the
inclusion of a full year of results from the California lease and rental
operations, which were acquired by the Company in June 1994, and (ii) the
addition of 65 trucks to the California lease and rental fleet during 1995.

Finance and insurance revenues increased by approximately $200,000, or
5.3%, from $3.8 million to $4.0 million from 1994 to 1995, primarily as a
result of the increased sales of new and used trucks discussed above and an
addition to the Company's insurance sales staff. Finance and insurance revenues
have limited direct costs and therefore contribute a disproportionate share of
operating profits.

Gross Profit

Gross profit increased by approximately $9.6 million, or 29.1%, from
$33.0 million to $42.6 million from 1994 to 1995, primarily due to the increase
in revenues discussed above. Gross profit as a percentage of sales increased
slightly from 16.0% to 16.3% from 1994 to 1995. Higher gross margins on new
truck sales and parts and service and body shop operations offset a decrease in
used truck gross margins and decreased spreads from financing activities caused
by rising interest rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by
approximately $5.4 million, from $25.8 million to $31.2 million, or 21.0%, from
1994 to 1995, primarily as a result of expenses associated with the California
operations. The balance of the increase resulted from variable expense
increases associated with higher revenues. As a percentage of revenues,
selling, general and administrative expenses declined from 12.5% to 12.0% from
1994 to 1995, due primarily to the spreading of fixed costs over a larger base
of sales, improved operating efficiencies from the integration of the Company's
facilities in California following their acquisition in February 1994, and
implementation of the Company's management information systems and distribution
and management systems discussed above.

Interest Expense

Interest expense increased by approximately $722,000, from $2.0
million to $2.8 million, or 35.3%, from 1994 to 1995. Almost half the increase
in interest expense relates to the inclusion of California results for a full
year in 1995. Increased interest expense was also due to the financing

27
28

of higher inventory levels to support sales growth as well as increases in
interest rates on the Company's variable-rate borrowings and higher average
outstanding debt balances.

Income from Continuing Operations

Income from continuing operations increased by $3.0 million, or 87.2%,
from $3.4 million to $6.4 million from 1994 to 1995, as a result of the factors
described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's short-term cash needs are primarily for working capital,
including inventory requirements, expansion of existing facilities and
acquisitions of new facilities. These short-term cash needs have historically
been financed with retention of profits and borrowings under credit facilities
available to the Company.

At December 31, 1996, the Company had working capital of approximately
$24.7 million, including, among other things, $21.5 million in cash and cash
equivalents, $23.1 million in accounts receivable and $36.7 million in
inventories, offset by $5.2 million of accounts payable, $8.6 million of
accrued expenses and $42.2 million outstanding under floor plan financing. The
aggregate maximum borrowing limits under working capital lines of credit with
its primary lender are approximately $6.0 million. The Company's floor plan
agreements with its primary lender limit the aggregate amount of borrowings
based on the number of new and used trucks. As of December 31, 1996, the
Company's floor plan arrangements permit the financing of up to 888 new trucks
and 349 used trucks.

For 1996, operating activities resulted in net cash provided by
operations of approximately $109,000. The cash provided by operations was
primarily due to higher levels of income and non-cash related depreciation and
amortization offset by increases in accounts receivable and other current
assets. Accounts receivable increased by $6.7 million during 1996, primarily as
a result of the acquisition of the Oklahoma facilities and several medium sized
fleet sales made at the end of the year. Prepaid and other current assets
increased by $1.2 million during 1996 as the Company escrowed a down payment of
$1.0 million for the acquisition of Denver Peterbilt, Inc.

During 1996, the Company used $8.1 million of net cash in investing
activities, including capital expenditures of $8.5 million in 1996 that were
principally related to the expansion of its various facilities.

Net cash provided by financing activities in 1996 amounted to $27.4
million. Cash flows from financing activities included proceeds of $31.4
million from the Company's initial public offering and exercise of stock
options, a net increase of $7.9 million in floor plan financings and net
proceeds from notes payable of $3.1 million. The Company paid dividends of
$10.2 million to its shareholder to distribute approximately $6.0 million of
previously taxed subchapter S earnings and approximately $4.2 million to enable
its shareholder to make required tax payments.

For 1995, operating activities resulted in net cash used in operations
of approximately $5.5 million. The use of cash in operations was primarily due
to higher levels of accounts receivable

28
29

and inventories. Accounts receivable increased by $7.4 million during 1995,
primarily as a result of a large fleet sale made at the end of the year.
Inventories increased by $10.6 million during 1995 as the Company returned to
normal inventory levels required to support increased sales volume and
expansion and due to the acquisition of the Oklahoma operations.

During 1995, the Company used $4.6 million of net cash in investing
activities, including capital expenditures of $6.3 million in 1995 that were
principally related to the expansion of its San Antonio facilities, the
purchase of trucks for its lease fleet, the purchase of a new corporate
aircraft and other capital spending. The Company also used net cash of $2.7
million in the acquisition of its Oklahoma operations in December 1995 and
received $3.6 million from the sale of discontinued operations.

Net cash provided by financing activities in 1995 amounted to $11.4
million. Cash flows from financing activities included a net increase of $13.1
million in floor plan financings and net proceeds from notes payable of $2.8
million. The Company paid dividends of $3.6 million on the Company's S
corporation earnings to enable its shareholder to make required tax payments.

During 1996, the Company arranged financing for approximately 31% of
its total new and used truck sales, with approximately 64% related to new truck
sales and the remaining 36% of financing related to used truck sales. The
Company's new and used truck financing is typically provided through Associates
and PACCAR Financial. The Company financed approximately $76.4 million of new
and used truck purchases in 1996. The Company's contracts with Associates and
PACCAR Financial provide for payment to the Company of all finance charges in
excess of a negotiated discount rate within 30 days of the date of financing,
with such payments subject to offsets resulting from the early pay-off, or
defaults under, installment contracts previously sold to Associates and PACCAR
Financial by the Company. The Company's agreements with Associates and PACCAR
Financial limit the aggregate liability of the Company for defaults under the
installment contracts sold to Associates and PACCAR Financial to $400,000 and
$200,000 per year, respectively.

Substantially all of the Company's truck purchases from PACCAR are
made on terms requiring payment within 15 days or less from the date of
shipment of the trucks from the factory. The Company finances all, or
substantially all, of the purchase price of its new truck inventory, and 75% of
the loan value of its used truck inventory, under a floor plan arrangement with
GMAC under which GMAC pays PACCAR directly with respect to new trucks. The
Company makes monthly interest payments on the amount financed but is not
required to commence loan principal repayments prior to sale on new vehicles to
GMAC for a period of 12 months and for used vehicles for a period of three
months. At December 31, 1996, the Company had $42.2 million outstanding under
its floor plan financing arrangement with GMAC. GMAC permits the Company to
earn, for up to one-half of the amount borrowed under its floor plan financing
arrangement with GMAC, interest at the prime rate on overnight funds deposited
by the Company with GMAC. Following this offering GMAC will increase the amount
of funds that the Company can earn interest at the prime rate to include
one-half of the outstanding floor plan financing, real estate financing and the
line of credit extended by GMAC.

29
30

Seasonality

The Company's business is moderately seasonal. Seasonal effects on new
truck sales related to the seasonal purchasing patterns of any single customer
type are mitigated by the Company's diverse customer base, including small and
large fleets, governments, corporations and owner operators. However, truck,
parts and service operations historically have experienced higher volumes of
sales in the second and third quarters. The Company has historically received
benefits from volume purchases and meeting vendor sales targets in the form of
cash rebates, which are typically recognized when received. Approximately 40%
of such rebates are typically received in the fourth quarter, resulting in a
seasonal increase in gross profit.

Cyclicality

The Company's business, as well as the entire retail heavy-duty truck
industry, is dependent on a number of factors relating to general economic
conditions, including fuel prices, interest rate fluctuations, economic
recessions and customer business cycles. In addition, unit sales of new trucks
have historically been subject to substantial cyclical variation based on such
general economic conditions. Although industry-wide domestic retail sales of
heavy-duty trucks exceeded 200,000 units for the first time in 1995 according
to R.L. Polk, new order volume declined toward the end of that year and the
industry recorded approximately 185,000 new truck registrations in 1996. The
industry forecasts a decline of approximately 8% in heavy-duty new truck sales
in 1997. Although the Company believes that its geographic expansion and
diversification into truck-related services, including financial services,
leasing, rentals and service and parts, will reduce the overall impact to the
Company resulting from general economic conditions affecting heavy-duty truck
sales, the Company's operations may be materially and adversely affected by any
continuation or renewal of general downward economic pressures or adverse
cyclical trends.

Effects of Inflation

The Company believes that the relatively moderate inflation over the
last few years has not had a significant impact on the Company's revenue or
profitability. The Company does not expect inflation to have any near-term
material effect on the sales of its products, although there can be no
assurance that such an effect will not occur in the future.

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31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Rush Enterprises, Inc.

Annual Financial Statements

Report of Independent Public Accountants

Consolidated Balance Sheets as of December 31, 1995 and 1996.

Consolidated Statements of Income for the years ended December 31, 1994, 1995
and 1996.

Consolidated Statements of Shareholder's Equity for the years ended December
31, 1994, 1995 and 1996

Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996.

Notes to Consolidated Financial Statements

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32

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of
Rush Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of Rush
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Rush Enterprises, Inc., and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Antonio, Texas
March 3, 1997

32
33

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1996

(In Thousands, Except Shares and Per Share Amounts)

1995 1996
---- ----

ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,149 $ 21,507
Accounts receivable, net 16,411 23,064

Inventories 36,517 36,688
Prepaid expenses and other 266 1,503
-------- ---------
Total current assets 55,343 82,762
PROPERTY AND EQUIPMENT, net 17,560 23,222
OTHER ASSETS, net 3,176 3,233
-------- ---------
Total assets $ 76,079 $109,217
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Floor plan notes payable $ 34,294 $ 42,228
Current maturities of long-term debt 3,600 2,115
Advances outstanding under lines of credit 10 20
Trade accounts payable 7,591 5,157
Dividends payable 1,615 -
Accrued expenses 7,607 8,566
-------- ---------
Total current liabilities 54,717 58,086
-------- ---------
LONG-TERM DEBT, net of current maturities 13,677 13,412
-------- ---------
DEFERRED INCOME TAXES - 1,027
-------- ---------
COMMITMENTS AND CONTINGENCIES (Note 17)

SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares
outstanding in 1995 and 1996 - -
Common stock, par value $.01 per share; 25,000,000 shares authorized;
3,750,000 shares outstanding in 1995 and 6,643,730 in 1996 (Note 3) 38 66
Additional paid-in capital 735 33,342
Retained earnings 6,912 3,284
-------- ---------
Total shareholders' equity 7,685 36,692
-------- ---------
Total liabilities and shareholders' equity $ 76,079 $ 109,217
======== =========

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

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34

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

(In Thousands, Except Per Share Amounts)

1994 1995 1996
---- ---- ----

REVENUES:
New and used truck sales $ 143,569 $ 192,949 $ 258,613
Parts and service 46,516 53,368 64,505
Lease and rental 5,476 10,058 13,426
Finance and insurance 3,774 3,980 5,855
Other 1,936 1,279 1,262
--------- --------- ---------
Total revenues 201,271 261,634 343,661
COST OF PRODUCTS SOLD 168,254 219,059 289,143
--------- --------- ---------
GROSS PROFIT 33,017 42,575 54,518
SELLING, GENERAL AND ADMINISTRATIVE 25,789 31,238 40,552
DEPRECIATION AND AMORTIZATION 1,615 1,846 2,416
--------- --------- ---------
OPERATING INCOME 5,613 9,491 11,550
--------- --------- ---------
INTEREST INCOME (EXPENSE):
Interest income - - 1,118
Interest expense 2,048 2,886 4,171
--------- --------- ---------
Total interest expense 2,048 2,886 3,053
--------- --------- ---------

MINORITY INTEREST 123 162 -
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
3,442 6,443 8,497
--------- --------- ---------
PROVISION FOR INCOME TAXES - - 2,295
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 3,442 6,443 6,202
--------- --------- ---------
DISCONTINUED OPERATIONS:
Operating income (loss) 283 (224) -
Gain on disposal - 1,785 -
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS 283 1,561 -
--------- --------- ---------
NET INCOME $ 3,725 $ 8,004 $ 6,202
========= ========= =========
UNAUDITED PRO FORMA DATA (Note 5):

Income from continuing operations before income taxes $ 6,443 $ 8,497
Pro forma adjustments to reflect federal and state income taxes 2,448 3,229
--------- ---------
Pro forma income from continuing operations after provision for income
taxes $ 3,995 $ 5,268
========= =========
Pro forma income from continuing operations per share $ .93 $ .94
========= =========
Weighted average shares outstanding used in the pro forma income from
continuing operations per share calculation 4,297 5,590
========= =========

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

34
35

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

(In Thousands)

Common Stock,
Rush Enterprises, Inc.
--------------------------
Shares Additional
Issued and $.01 Paid-In Retained
Outstanding Par Value Capital Earnings
----------- --------- ---------- --------

BALANCE, December 31, 1993 3,750 $ 38 $ 735 $ 1,933

NET INCOME - - - 3,725

DIVIDENDS DECLARED - - - (2,055)
----- ------- -------- --------
BALANCE, December 31, 1994 3,750 38 735 3,603

NET INCOME - - - 8,004

DIVIDENDS DECLARED - - - (4,695)
----- ------- -------- --------
BALANCE, December 31, 1995 3,750 38 735 6,912

NET INCOME, January 1, 1996, through June 11, 1996 - - - 2,918

DIVIDENDS DECLARED - - - (8,559)

REORGANIZATION FROM S CORPORATION TO
C CORPORATION - - 1,271 (1,271)

OPTIONS EXERCISED 19 - 205 -

ISSUANCE OF COMMON STOCK, net of issuance costs 2,875 28 31,131 -

NET INCOME, June 12, 1996, through December 31, 1996 - - - 3,284
--------- ------- -------- --------
BALANCE, December 31, 1996 6,644 $ 66 $33,342 $ 3,284
====== ======= ======== ========

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

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36

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

(In Thousands)

1994 1995 1996
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 3,442 $ 6,443 $ 6,202
Adjustments to reconcile net income from continuing operations to net
cash provided by (used in) operating activities-
Depreciation and amortization 1,615 1,846 2,416
Provision for deferred income tax expense - - 1,027
Minority interest 123 162 -
Change in receivables (5,685) (7,407) (6,653)
Change in inventories 1,738 (10,591) (171)
Change in other current assets 14 18 (1,237)
Change in accounts payable 2,140 599 (2,434)
Change in accrued liabilities 2,989 2,678 959
--------- --------- ---------
Net cash provided by (used in) continuing operations 6,376 (6,252) 109
Net cash provided by (used in) discontinued operations (479) 785 -
--------- --------- ---------
Net cash provided by (used in) operating activities 5,897 (5,467) 109
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,368) (6,311) (8,491)
Proceeds from the sale of property and equipment - 1,229 682
Acquisitions of dealerships and leasing operations (8,878) (2,690) -
Proceeds from the sale of discontinued operations - 3,601 -
Investment by (purchase of) minority interest 150 (435) -
Change in other assets (265) (27) (326)
--------- --------- ---------
Net cash used in investing activities (11,361) (4,633) (8,135)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs - - 31,364
Proceeds from notes payable 2,356 9,629 3,150
Principal payments on notes payable (2,620) (6,811) (4,900)
Draws (payments) on floor plan financing, net 6,677 13,053 7,934
Draws (payments) on line of credit, net (90) (850) 10
Dividends paid (1,512) (3,623) (10,174)
--------- --------- ---------
Net cash provided by financing activities 4,811 11,398 27,384
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (653) 1,298 19,358

CASH AND CASH EQUIVALENTS, beginning of year 1,504 851 2,149
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 851 $ 2,149 $ 21,507
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 2,272 $ 2,552 $ 4,254
========= ========= =========
Income taxes $ - $ - $ 1,332
========= ========= =========

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

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RUSH ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994, 1995 AND 1996

1. ORGANIZATION AND OPERATIONS:
_
Rush Enterprises, Inc. (the Company), was incorporated in June 1996 under the
laws of the State of Texas.

The Company, founded in 1965, operates a regional network of 14 truck centers
that provide an integrated one-stop source for the trucking needs of its
customers, including retail sales of new Peterbilt and used heavy-duty trucks;
parts, service and body shop facilities; and financial services, including
assisting in the financing of new and used truck purchases, insurance products
and truck leasing and rentals. The Company's truck centers are located in areas
on or near major highways in Texas, California, Oklahoma and Louisiana.

In February 1994, the Company acquired a 90 percent interest in South Coast
Peterbilt (South Coast) and Translease- California. In August 1995, the Company
purchased the remaining 10 percent minority interest (see Note 17).

In March 1995, the Company sold its Rush Pontiac-GMC dealership to a third
party. Rush Pontiac-GMC sold passenger automobiles and small- to medium-used
trucks to the general public. The results of operations and net assets of this
division have been presented as discontinued operations for all years presented
(see Note 4).

In December 1995, the Company purchased substantially all the assets of Kerr
Consolidated, Inc. (Kerr), and began operations of Oklahoma Trucks, Tulsa
Trucks and Translease-Oklahoma. Kerr's primary line of business is the sale of
new Peterbilt and used heavy-duty trucks, parts, leasing and service (see Note
17).

As part of the corporate reorganization on June 12, 1996 (see Note 3),
Associated Acceptance, Inc. (Associates), came under the control of the Company
and, thus, 100 percent of the financial position and results of operations of
Associates has been included in the Company's consolidated financial statements
as of December 31, 1996. The Company has restated 1994 and 1995's shareholders'
equity to reflect Associates as part of the Company's consolidated
shareholders' equity consistent with the 1996 financial statement presentation.
The restatement was not material to the Company's shareholders' equity.

All significant interdivision and intercompany accounts and transactions have
been eliminated. Certain prior period amounts have been reclassified for
comparative purposes.

2. SIGNIFICANT ACCOUNTING POLICIES:

Estimates in Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles 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 may differ from those estimates.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined
by specific identification for new and used truck inventory and by utilizing
the first-in, first-out methods for tires, parts and accessories.

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Property and Equipment

Property and equipment are being depreciated over their estimated useful lives.
Leasehold improvements are amortized over the useful life of the improvement,
or the term of the lease, whichever is shorter. Both the straight-line and
double declining-balance methods of depreciation are used. The cost,
accumulated depreciation and amortization and estimated useful lives are
summarized as follows (in thousands):

December 31 Estimated
----------------------
1995 1996 Life (Years)
-------- --------- ------------

Land $ 2,874 $ 4,714 -
Buildings and improvements 5,384 8,004 31 - 39
Leasehold improvements 980 1,569 7 - 10
Machinery and shop equipment 2,219 3,035 5 - 7
Furniture and fixtures 1,692 2,907 5 - 7
Transportation equipment 3,386 3,792 2 - 5
Leased vehicles 5,337 4,769 3 - 7
Accumulated depreciation and amortization (4,312) (5,568)
-------- ---------
$ 17,560 $ 23,222
======== =========

Allowance for Doubtful Receivables
and Repossession Losses

The Company provides an allowance for doubtful receivables and repossession
losses after considering historical loss experience and other factors, which
might affect the collectibility of accounts receivable and the ability of
customers to meet their obligations on finance contracts sold by the Company.

Other Assets

Other assets primarily consist of approximately $2,800,000 of goodwill acquired
by the Company as part of the Kerr acquisition in 1995 and long-term deposits.
The goodwill is being amortized on a straight-line basis over an estimated
useful life of 30 years. Accumulated amortization at December 31, 1995 and
1996, was approximately $8,000 and $140,000, respectively. Periodically, the
Company assesses the appropriateness of the asset valuations of goodwill and
the related amortization period.

Income Taxes

Effective with the corporate reorganization on June 12, 1996 (see Note 3), the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in a company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
and tax bases of assets and liabilities using currently enacted tax rates in
effect for the years in which the differences are expected to reverse.

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39

Revenue Recognition Policies

Income on the sale of vehicles is recognized when the seller and customer
execute a purchase contract and there are no significant uncertainties related
to financing or delivery. Finance income related to the sale of a vehicle is
recognized over the period of the respective finance contract on the effective
interest rate method if the finance contract is retained by the Company. During
1994, 1995 and 1996, no finance contracts were retained for any significant
length of time by the Company but were generally sold, with limited recourse,
to certain finance companies concurrent with the sale of the related vehicle.
Gain or loss is recognized by the Company upon the sale of such finance
contracts to the finance companies, net of a provision for estimated
repossession losses and early repayment penalties. Leasing income is recognized
over the period of the related lease agreement. Parts and services revenue is
earned 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 vehicle.

Statement of Cash Flows

Cash and cash equivalents generally consist of cash and other money market
instruments. The Company considers any temporary investments that mature in
three months or less when purchased to be cash equivalents for reporting cash
flows.

Noncash activities during the periods indicated were as follows (in thousands):

Year Ended December 31
----------------------
1994 1995 1996
---- ---- ----

Liabilities incurred in connection with property and
equipment acquisitions $ - $ 2,022 $2,901
Liabilities incurred in connection with acquisitions of
dealerships and leasing operations 984 3,550 -

New Accounting Pronouncements

In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss must be
recognized, for long-lived assets and certain identifiable intangibles to be
held and used by an entity, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. FAS 121
is effective for financial statements issued for fiscal years beginning after
December 15, 1995, and must be adopted on a prospective basis. Restatement of
previously issued financial statements is not permitted. The Company adopted
FAS 121 prospectively in the first quarter of 1996. The adoption of FAS 121 did
not have a material effect on the financial condition or results of operations
of the Company.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996 (SFAS 125).
This statement provides accounting and reporting standards for, among other
things, the transfer and servicing of financial assets, such as factoring
receivables with recourse. This statement is effective for transfers and
servicing of financial assets occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" (SFAS 127). SFAS 127 moves forward some, but not all,
of the provisions of SFAS 125 to December 31, 1997. The Company believes the
adoption of this statement will not have an impact on the financial condition
or results of operations of the Company.

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40

In March 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), was issued. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS 128 is
effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier application is not permitted. SFAS 128 requires restatement of
all prior period EPS data presented. The Company believes the adoption of this
statement will not have an impact on the financial condition or results of
operations of the Company.

3. INITIAL PUBLIC OFFERING AND
CORPORATE REORGANIZATION:

The Company filed a Registration Statement with the Securities and Exchange
Commission for an underwritten offering of 2,875,000 shares of common stock,
including underwriters' overallotment option, which became effective on June
12, 1996 (the Offering). The Company used the net proceeds of the Offering to
retire certain debt obligations, fund potential acquisition opportunities which
may arise in the future and for general corporate purposes.

As part of the Offering on June 12, 1996, the Company terminated its S
corporation federal tax election and was subject to federal and certain state
income taxes from that date forward. On June 12, 1996, the Company paid the S
corporation shareholder approximately $8.6 million representing the
undistributed accumulated earnings of the S corporation prior to June 12, 1996.

Following the Offering, there were 6,625,000 common shares outstanding,
including 3,750,000 owned by the shareholder of the predecessor S corporation.

The weighted average number of shares of common stock outstanding as of
December 31, 1996, was 5,345,192.

Dividends declared, paid or payable for the years ended December 31, 1994, 1995
and 1996, were related to the Company's sole shareholder prior to the
reorganization and Offering.

As part of the reorganization, the Company acquired, as a wholly owned
subsidiary, a managing general agent (the MGA) to manage all of the operations
of Associated Acceptance, Inc. (AA). The MGA is responsible for funding the
operations of AA, directing the use of AA's assets and incurring liabilities on
AA's behalf in exchange for the MGA receiving any and all net income of AA. W.
Marvin Rush, the sole shareholder of AA, is prohibited from the sale or
transfer of the capital stock of AA under the MGA agreement, except as
designated by the Company. Therefore, the financial position and operations of
AA have been included as part of the Company's consolidated financial position
and results of operations.

4. DISCONTINUED OPERATIONS:

In March 1995, the Company sold its Pontiac-GMC Truck division and, therefore,
has accounted for these operations as discontinued operations. Under the terms
of the sales agreement, the Buyer purchased the new car and truck inventory.
The Company received approximately $3,601,000 for the sale of the dealership.

The results of the division's operations and cash flows have been classified as
discontinued operations for all periods presented in the consolidated
statements of income and cash flows. All assets and liabilities of the
Pontiac-GMC Truck division were sold prior to December 31, 1995.

Sales revenues applicable to Rush Pontiac-GMC were $30,305,000 and $6,435,000
for the years ended December 31, 1994 and 1995, respectively.

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41

5. PRO FORMA INFORMATION (UNAUDITED):

Pro Forma Income From Continuing Operations and
Income From Continuing Operations Per Share (Unaudited)

Pro forma income from continuing operations and pro forma income from
continuing operations per share have been determined assuming that the Company
had been taxed as a C corporation for federal and certain state income tax
purposes since January 1, 1995.

Pro forma income from continuing operations per share had been computed using
the weighted average number of common shares outstanding of the Company.
Weighted average common shares for all periods presented prior to the Offering
have been increased by 547,400 shares to reflect the number of shares that
would have to have been sold at the offering price per share to repay an
approximate $6,000,000 distribution of undistributed S corporation earnings as
of December 31, 1995.

Pro Forma Balance Sheet (Unaudited)

The balance sheet at December 31, 1995, would have been effected by the
following transactions, as if such transactions occurred on that date:

(1) The payment of a distribution of $6,000,000 which represented
substantially all of the Company's undistributed S corporation
earnings at December 31, 1995. Such distribution of undistributed
earnings would be funded by draws on the Company's line of credit
which would be repaid by a portion of the proceeds from the Offering.

(2) An estimated $520,000 deferred tax liability, which would be required
as a reduction of retained earnings had the Company terminated its S
corporation status at December 31, 1995. (See Note 15.)

(3) The reclassification of the remaining balance of retained earnings to
additional paid-in capital.

6. SUPPLIER AND CUSTOMER CONCENTRATION:

Major Suppliers and Dealership Agreements

The Company has entered into dealership agreements with various companies
(Distributors). These agreements are nonexclusive agreements that allow the
Company to stock, sell at retail and service trucks and products of the
Distributors in the Company's defined market. The agreements allow the Company
to use the Distributor's name, trade symbols and intellectual property and
expire as follows:

Distributor Expiration Dates
----------- ----------------

PACCAR April 1997 to
March 2000
GMC October 2000
Volvo March 2000

These agreements impose a number of restrictions and obligations on the
Company, including restrictions on a change in control of the Company and the
maintenance of certain required levels of working capital. Violation of such
restrictions could result in the loss of the Company's right to purchase the
Distributor's products and use the Distributor's trademarks. As of December 31,
1996, the Company's management believes it was in compliance with all the
restrictions of its dealership agreements.

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42

The Company purchases most of its new vehicles and parts from PACCAR, the maker
of Peterbilt trucks and parts, at prevailing prices charged to all franchised
dealers. Sales of new Peterbilt trucks accounted for 95 percent of the
Company's new vehicle sales for the years ended December 31, 1995 and 1996.

Primary Lender

The Company purchases its new and used truck inventories with the assistance of
a floor plan financing program from a single financial institution. Such
financial institution also provides the Company with lines of credit which
allow borrowings of up to $6,000,000 and various variable interest rate notes.

The loan agreements with this financial institution generally provide that such
agreements may be terminated at the option of the lender with notice of 120
days. Further, the agreements provide that the occurrence of certain events,
including termination of the Company's GMC dealership agreement, will be
considered events of default under agreements. In the event that the Company's
financing becomes insufficient, or its relationship terminates with the current
primary lender, the Company would need to obtain similar financing from other
sources. Management believes it can obtain additional floor plan financing or
alternative financing if necessary. (See Note 9.)

The Company is currently renegotiating the loan agreement which the Company
believes will increase the line-of-credit borrowing limit to $8,000,000.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.

The Company places its cash and cash equivalents with what it considers to be
quality financial institutions. At December 31, 1996, the Company had deposits
in excess of federal insurance totaling approximately $4,400,000.

Concentrations of credit risk with respect to trade receivables are reduced
because a large number of geographically diverse customers make up the
Company's customer base, thus, spreading the trade credit risk. A majority of
the Company's business, however, is concentrated in the United States
heavy-duty trucking market and related aftermarkets. The Company controls
credit risk through credit approvals and by selling certain trade receivables
without recourse. Related to the Company's finance contracts, after the
finance contract is entered into, the Company generally sells the contracts to
a third party. The finance contracts are sold with recourse, but the annual
amount of recourse losses which can be put to the Company is contractually
limited. (See Note 16.) Historically, bad debt expense associated with the
Company's accounts receivable and finance contracts has not been material.

7. ACCOUNTS RECEIVABLE:

The Company's accounts receivable, net, consisted of the following as of
December 31, 1995 and 1996 (in thousands).

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1995 1996
-------- --------

Trade accounts receivable from sale of vehicles $ 12,428 $ 19,771
Other trade receivables 1,925 1,673
Warranty claims 706 1,610
Related parties 784 -
Other accounts receivable 856 617
Less- Allowance for doubtful receivables and
repossession losses (288) (607)
-------- --------
Total $ 16,411 $ 23,064
======== ========

Accounts receivables-related parties represents receivables with entities in
which the stockholder and/or key members of the Company's management have a
controlling interest. These receivables are primarily related to short-term
advances made by the Company or receivables as a result of arm's-length
transactions between the Company and the related parties. For the years ended
December 31, 1994, 1995 and 1996, the Company had sales to one of its related
parties of approximately $535,000, $770,000 and $939,000, respectively.

8. INVENTORIES:

The Company's inventories consisted of the following as of December 31, 1995
and 1996 (in thousands):

1995 1996
-------- ---------

New vehicles $ 21,870 $ 17,514
Used vehicles 5,490 7,926
Parts and accessories 8,744 10,360
Tires 413 888
-------- ---------
Total $ 36,517 $ 36,688
======== =========

9. FLOOR PLAN NOTES PAYABLE AND LINES OF CREDIT:

Floor Plan Notes Payable

Floor plan notes are financing agreements to facilitate the Company's purchase
of new and used trucks. These notes are collateralized by the inventory
purchased and accounts receivable arising from the sale thereof. The Company's
floor plan notes have interest rates at prime plus a percentage rate as
determined by the finance provider, as defined in the agreement. The interest
rate applicable to these agreements was 8.25 percent at December 31, 1995 and
1996. The amounts borrowed under these agreements are due when the related
truck inventory (collateral) is sold and the sales proceeds are collected by
the Company. These lines are discretionary and may be modified, suspended or
terminated at the election of the lender, at any time.

The Company's floor plan agreements with its primary lender limit the borrowing
capacity based on the number of new and used trucks that may be financed. As of
December 31, 1996, the aggregate amounts of unit capacity for new and used
trucks are 888 and 349, respectively, and the availability for new and used
trucks is 379 and 125, respectively.

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Amounts of collateral as of December 31, 1996, are as follows (in thousands):

Inventories, new and used vehicles at cost based on specific
identification $ 25,440
Truck sale related accounts receivable 19,770
--------
Total $ 45,210
========
Floor plan notes payable $ 42,228
========

Lines of Credit

The Company has a separate line-of-credit agreement with a financial
institution which provides for an aggregate maximum borrowing of $6,000,000,
with advances generally limited to 75 percent of new parts inventory and
eligible accounts receivable (as defined). Advances bear interest at prime.
Advances under the line-of-credit agreement are secured by new parts inventory.
The line-of-credit agreement contains financial covenants which include the
maintenance of a certain level of tangible net worth (as defined). The Company
was in compliance with these covenants at December 31, 1996. Either party may
terminate the agreement with 60 days written notice. As of December 31, 1995
and 1996, advances outstanding under the various line-of-credit agreements
amounted to $20,000. As of December 31, 1996, $5,980,000 was available for
future borrowings. This line is discretionary and may be modified, suspended or
terminated at the election of the lender.

10. LONG-TERM DEBT:

Long-term debt is comprised of the following as of December 31, 1995 and 1996
(in thousands):

1995 1996
-------- ---------

Variable interest rate term notes $ 5,139 $ 5,305
Fixed interest rate term notes 11,248 10,222
Advance from related party 890 -
-------- ---------
Total debt 17,277 15,527
Less- Current maturities (3,600) (2,115)
-------- ---------
$ 13,677 $ 13,412
======== =========

Advance from related party was a short-term advance from a company controlled
by the Company's sole shareholder. The advance carried interest at prime rate
and was paid in 1996.

As of December 31, 1996, debt maturities are as follows (in thousands):

1997 $ 2,115
1998 2,615
1999 1,660
2000 1,720
2001 3,358
Thereafter 4,059
--------
$ 15,527
========

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The Company's variable interest rate notes are with the Company's primary
lender and have an interest rate of prime, which was 8.25 percent at December
31, 1996. Monthly payments of these notes range from $2,708 to $9,922, plus
interest. Maturities of these notes range from January 1999 to February 2011.

The Company's fixed interest rate notes are primarily with financial
institutions and have interest rates ranging from 7.5 percent to 10.5 percent
at December 31, 1996. Monthly payments on the notes range from $223 to $26,662,
including principal and interest. Maturities of these notes range from January
1997 to November 2012.

The proceeds from the issuance of the variable and fixed rate notes were used
primarily to acquire land, buildings and improvements, transportation equipment
and leased vehicles. The notes are secured by the assets acquired by the
proceeds of such notes.

11. DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS:

In December 1991, Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures About Fair Value of Financial Instruments," was issued. SFAS
107 requires disclosures of the fair value of financial instruments. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument held by the Company:

Current assets and current liabilities- The carrying value
approximates fair value due to the short maturity of these items.

Long-term debt - The fair value of the Company's long-term debt is
based on secondary market indicators. Since the Company's debt is
not quoted, estimates are based on each obligation's
characteristics, including remaining maturities, interest rate,
credit rating, collateral, amortization schedule and liquidity. The
carrying amount approximates fair value.

12. DEFINED CONTRIBUTION PENSION PLANS:

The Company has a defined contribution pension plan (the Rush Plan) which is
available to all Company employees and the employees of certain affiliates,
except employees of South Coast, a wholly owned subsidiary of the Company. As
of December 31 of every year, each employee who has completed one year of
continuous service is entitled to enter the Rush Plan. Participating employees
may contribute from 2 percent to 10 percent of total gross compensation. The
Company, at its discretion, contributed an amount equal to 25 percent of the
employees' contributions. During the years ended December 31, 1994, 1995 and
1996, the Company incurred expenses of approximately $115,000, $127,000 and
$166,000, respectively, related to the Rush Plan.

South Coast also has a defined contribution pension plan (the South Coast Plan)
which is available to all employees of South Coast. As of January 1 and July 1
of every year, each employee who has completed one year of continuous service
is entitled to enter the South Coast Plan. Participating employees do not
contribute. South Coast, at its discretion, contributes an amount equal to 2.5
percent of the employees' compensation. During the years ended December 31,
1994, 1995 and 1996, South Coast incurred expenses of approximately $117,000,
$166,000 and $185,000, respectively, related to the South Coast Plan.

The Company currently does not provide any postretirement benefits other than
pensions nor does it provide any postemployment benefits.

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13. LEASES:

Vehicle Leases

The Company leases vehicles primarily over periods ranging from one to six
years under operating lease arrangements. This equipment is subleased to
customers under various agreements in its own leasing operation. Generally, the
Company is required to incur all operating costs and pay a minimum rental and
an excess mileage charge based on maximum mileage over the term of the lease.
Vehicle lease expenses for the years ended December 31, 1994, 1995 and 1996,
were approximately $2,600,000, $4,076,000 and $5,528,000, respectively.

Minimum rental commitments for noncancelable vehicle leases in effect at
December 31, 1996, are as follows (in thousands):

1997 $ 6,320
1998 5,516
1999 4,294
2000 2,773
2001 1,508
Thereafter 1,344
--------
Total $ 21,755
========

Customer Vehicle Leases

A Company division leases both owned and leased vehicles to customers primarily
over periods of one to six years under operating lease arrangements. The leases
require a minimum rental and a contingent rental based on mileage. Rental
income during the years ended December 31, 1994, 1995 and 1996, consisted of
minimum payments of approximately $3,600,000, $5,915,000 and $10,250,000,
respectively, and contingent rentals of approximately $600,000, $2,076,000 and
$4,188,000, respectively. Minimum lease payments to be received for
noncancelable leases and subleases in effect at December 31, 1996, are as
follows (in thousands):

1997 $ 7,592
1998 6,544
1999 5,071
2000 3,284
2001 1,983
Thereafter 1,714
-------
Total $26,188
=======

Other Leases - Land and Buildings

The Company leases various facilities under operating leases which expire at
various times through 2006. Rental expense for the years ended 1994, 1995 and
1996 was $712,000, $762,000 and $937,000, respectively. Future minimum lease
payments under noncancelable leases at December 31, 1996, are as follows (in
thousands):

1997 $ 461
1998 455
1999 429
2000 415
2001 335
Thereafter 1,516
-------
Total $ 3,611
=======

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14. STOCK OPTIONS AND STOCK PURCHASE WARRANTS:

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period of the award,
which is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). The Company has
adopted SFAS 123 effective January 1, 1996, and has elected to remain with the
accounting prescribed by APB 25. The Company has not presented the pro forma
information required by SFAS 123 as the pro forma net income and net income per
share would not have been materially different than actual results. As of
December 31, 1996, there were no options outstanding under the Company's
Incentive Plan (as hereinafter defined).

In April 1996, the Board of Directors and shareholders adopted the Rush
Enterprises, Inc. Long-Term Incentive Plan (the Incentive Plan). The Incentive
Plan provides for the grant of stock options (which may be nonqualified stock
options or incentive stock options for tax purposes), stock appreciation rights
issued independent of or in tandem with such options (SARs), restricted stock
awards and performance awards.

The aggregate number of shares of common stock subject to stock options or SARs
that may be granted to any one participant in any one year under the Incentive
Plan is 100,000 shares. The Company has 500,000 shares of common stock reserved
for issuance upon exercise of any awards granted under the Company's Incentive
Plan.

In connection with the Offering, the Company agreed to issue to the
Representatives of the Underwriters and their designees, for their own
accounts, warrants to purchase an aggregate of 250,000 shares of common stock.
The warrants are exercisable during the four-year period commencing June 12,
1997, at an exercise price per share equal to $14.40.

In April 1996, the Company granted options under the Incentive Plan to purchase
an aggregate of 19,403 shares to 18 employees, all of which are fully vested.
The options were exercisable at $10.80, the fair value of the options at the
date of grant. During the year, 18,730 options were exercised and 673 options
were forfeited. All transactions were valued at the weighted average exercise
price of $10.80.

On April 8, 1996, the Board of Directors of the Company declared a dividend of
one common share purchase right (a Right) for each share of common stock
outstanding. Each Right entitles the registered holder to purchase from the
Company one share of common stock at a price of $35.00 per share (the Purchase
Price). The Rights are not exercisable until the distribution date, as defined.
The Rights will expire on April 7, 2006 (the Final Expiration Date), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company.

15. INCOME TAXES:

Prior to the Offering of the Company's common stock, the Company maintained the
status of S corporation for federal and certain state income tax purposes. As
an S corporation, the Company was generally not responsible for income taxes.

Upon the closing of the Offering, the Company's S corporation election
terminated and the Company was reorganized as described in Note 3. Accordingly,
the Company became subject to federal and state income taxes from that date
forward.

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48

Prior to consummation of the Offering, the Company made distributions of the
Company's undistributed S corporation earnings to its shareholder. As of
December 31, 1995, such undistributed S corporation earnings aggregated
approximately $6,000,000 (excluding accrued dividends payable of $1,615,000 as
of December 31, 1995). The Company paid the undistributed S corporation
earnings through draws on the Company's lines of credit which were repaid from
the proceeds of the Offering.

In addition, upon the Company's termination of its S corporation status, the
Company provided deferred income taxes for cumulative temporary differences
between the tax basis and financial reporting basis of its assets and
liabilities at the date of termination. If the termination had occurred at
December 31, 1995, the net deferred income tax liability, calculated in
accordance with SFAS 109, "Accounting for Income Taxes," would have
approximated $520,000 (unaudited). The tax liability is primarily due to basis
differences of $920,000 related to property and equipment, net of $400,000, in
deferred tax assets associated with inventories and with accruals and reserves
deducted for financial reporting purposes but not for tax purposes. This
deferred tax liability is charged against income from continuing operations in
the period the Company's tax status changes.

Provision for Income Taxes

The unaudited pro forma provision for income taxes represents the estimated
income taxes on income from continuing operations that would have been reported
under SFAS 109 had the Company been a taxable entity for both state and federal
income tax purposes as of the beginning of the years ended December 31, 1995
and 1996. The pro forma income tax provision for the years ended December 31,
1995 and 1996, and actual tax provision for the year ended December 31, 1996,
are summarized as follows (in thousands):

Pro Forma Actual
---------
1995 1996 1996
---- ---- ----
(Unaudited)

Current provision-
Federal $ 1,945 $ 2,189 $ 1,002
State 230 257 266
------- ------- -------
2,175 2,446 1,268
------- ------- -------
Deferred provision-
Federal 245 714 1,035
State 28 69 (8)
------- ------- -------
273 783 1,027
------- ------- -------
Provision for income taxes $ 2,448 $ 3,229 $ 2,295
======= ======= =======

The following summarizes the tax effect of significant cumulative temporary
differences that are included in the net deferred income tax liability as of
December 31, 1996 (in thousands):

Differences in depreciation and amortization $ 1,392
Accruals and reserves not deducted for tax purposes until paid (240)
Other, net (125)
-------
$ 1,027
=======

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A reconciliation of taxes based on the federal statutory rate of 34 percent and
the unaudited pro forma and actual provisions for income taxes for the years
ended December 31, 1995 and 1996, are summarized as follows (in thousands):

Pro Forma Actual
---------
1995 1996 1996
---- ---- ----
(Unaudited)

Income taxes at the federal statutory rate $ 2,191 $ 2,889 $1,897
State income taxes, net of federal benefit 170 216 230
Other, net 87 124 168
------- ------- ------
Provision for income taxes $ 2,448 $ 3,229 $2,295
======= ======= ======

16. COMMITMENTS AND CONTINGENCIES:

The Company is contingently liable to finance companies for the notes sold to
such finance companies related to the sale of trucks. The Company's recourse
liability related to sold finance contracts is limited to 15 to 25 percent of
the outstanding amount of each note sold to the finance company with the
aggregate recourse liability for 1996 being limited to $600,000. The Company
provides an allowance for repossession losses and early repayment penalties.

Finance contracts sold with recourse during the years ended December 31, 1994,
1995 and 1996, were $45,453,000, $53,165,000 and $76,390,000, respectively.

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.

The Company has consulting agreements with individuals for an aggregate monthly
payment of $15,725. The agreements expire in 1999 through 2001.

17. ACQUISITIONS:

In February 1994, South Coast acquired substantially all of the operations of
an existing Peterbilt truck dealership in Southern California. The purchase
price was approximately $9,562,000 consisting of $3,139,000 in cash, $5,439,000
in floor plan financing for inventory and a note to the seller in the amount of
$984,000. South Coast was initially owned 90 percent by the Company and 10
percent was owned by a minority interest owner.

In June 1994, South Coast acquired substantially all of the operations of an
existing truck leasing company in Southern California. The purchase price was
$300,000.

The acquisitions have been accounted for as purchases; operations of the
businesses acquired have been included in the accompanying consolidated
financial statements from their respective dates of acquisition. The purchase
price has been allocated based on the fair values of the assets at the date of
acquisition as follows (in thousands).

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50

Inventories $ 8,310
Property and equipment 1,327
Leased assets 225
-------
Total $ 9,862
=======

In August 1995, the Company purchased the minority interest in South Coast. The
Company paid approximately $435,000 for the remaining 10 percent ownership
interest.

In December 1995, the Company acquired substantially all of the assets and
leasing operations of Kerr, an existing Peterbilt truck dealership in Oklahoma.
The purchase price was approximately $10,155,000 consisting of approximately
$2,690,000 in cash, floor plan financing for inventory of $3,915,000, a note
payable to a financial institution of $750,000 and a note to the seller for
$2,800,000. During the first quarter of 1996, the Company acquired land and
buildings related to the acquisition of certain assets of Kerr for
approximately $1,700,000. The Company paid approximately $425,000 in cash and
entered into mortgage notes payable of approximately $1,275,000 due in monthly
installments of principal and interest over approximately 10 years. Also,
concurrent with the closing of this transaction, the Company entered into a
construction loan of approximately $638,000 for new buildings to be constructed
at the Oklahoma operation beginning in 1996.

The acquisition has been accounted for as a purchase; operations of the
business acquired have been included in the accompanying consolidated financial
statements from the respective date of acquisition. The purchase price has been
allocated based on the fair values of the assets at the date of acquisition as
follows (in thousands):

Inventories $ 6,981
Property and equipment 345
Leased assets 29
Goodwill 2,800
--------
Total $ 10,155
========

The following unaudited pro forma summary presents information as if the Kerr
acquisitions, and the minority interest in South Coast acquisition and the sale
of the Rush Pontiac-GMC dealership (see Note 4) had occurred at the beginning
of fiscal year 1995. The pro forma information is provided for information
purposes only. It is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the Company. In preparing the pro
forma data, adjustments have been made to reflect the impact of income tax
expense for the respective periods and the weighted average common shares
outstanding used in the computation of income from continuing operations per
share has been increased to reflect the number of shares at the Offering price
necessary to fund repayment of the line of credit drawn to pay the $6 million
distribution of undistributed S corporation earnings. The following summary is
for the year ended December 31, 1995 (unaudited) (in thousands, except per
share amounts):

Revenues from continuing operations $ 333,279
=========
Income from continuing operations after pro forma
provision for income taxes $ 4,277
==========
Income from continuing operations per share $ 1.00
=======

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18. UNAUDITED QUARTERLY FINANCIAL DATA:

(In thousands, except per share amounts.)

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

1996
----
Operating revenues $78,671 $84,492 $ 87,132 $ 93,366
Operating income 2,392 2,961 3,000 3,197
Income from continuing operations before income taxes 1,452 2,006 2,447 2,592
Pro forma income from continuing operations after provision
for income taxes 880 1,244 1,537 1,607
Pro forma income from continuing operations per share $.21 $.26 $.23 $.24

1995
----
Operating revenues $63,323 $65,340 $ 64,673 $ 68,298
Operating income 1,758 2,165 2,247 3,321
Income from continuing operations before income taxes 1,128 1,454 1,506 2,355
Income from discontinued operations 1,560 1 - -
Pro forma income from continuing operations after provision
for income taxes 699 902 934 1,460
Pro forma income from continuing operations per share $.16 $.21 $.22 $.34

19. SUBSEQUENT EVENTS:

On March 3, 1997, the Company caused its wholly owned subsidiary, Rush Truck
Centers of Colorado, Inc., to acquire substantially all of the assets of Denver
Peterbilt, Inc., for total consideration of approximately $7.9 million
consisting of approximately $6.5 million in cash and floor plan financing for
inventory of $1.4 million. The Company will account for the acquisition as a
purchase.

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52
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.

RUSH ENTERPRISES, INC.

By: /s/ W. MARVIN RUSH Date: June 25, 1997
------------------------------
W. Marvin Rush
Chairman and Chief Executive
Officer