Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or MD&A) is intended to help the reader understand USA Truck, Inc., our operations and our present business environment. MD&A is provided as a supplement to and should be read in conjunction with our consolidated financial statements and notes thereto and other financial information that appears elsewhere in this report. This overview summarizes the MD&A, which includes the following sections:

Our Business - a general description of our business, the organization of our operations and the divisions that comprise our operations.

Results of Operations - an analysis of our consolidated results of operations for the three years presented in our consolidated financial statements and a discussion of seasonality, the potential impact of inflation and fuel availability and cost.

Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, debt, equity and contractual obligations.

Critical Accounting Estimates - a discussion of accounting policies that require critical judgment and estimates.

Our Business

We operate in the for-hire truckload segment of the trucking industry. Customers in a variety of industries engage us to haul truckload quantities of freight, with the trailer we use to haul that freight being assigned exclusively to that customer's freight until delivery. We have various service offerings, which we combine into two operating segments, through which we provide transportation services. We aggregate the financial data for these operating segments into one reportable segment for purposes of our public reporting.

We previously organized our divisions into three segments, as described in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2005. Due to the evolution of our business over the past few years, during the quarter ended June 30, 2006, we reclassified our five divisions into two segments for internal reporting and monitoring purposes. The information we present in this report reflects this change.

Our business is classified into the Trucking operating segment and the Strategic Capacity Solutions operating segment, which we previously designated as operating divisions. Our Trucking operating segment includes those transportation services in which we use Company-owned tractors and owner-operator tractors, as well as Trailer-on-Flat-Car rail intermodal service. Our Strategic Capacity Solutions operating segment, which we previously referred to as USA Logistics, consists of services such as freight brokerage, transportation scheduling, routing and mode selection, as well as Container-on-Flat-Car rail intermodal service, which typically do not involve the use of Company-owned or owner-operator equipment. Both Trucking and Strategic Capacity Solutions have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this report. Accordingly, they have been aggregated into one segment for financial reporting purposes.

Substantially all of our base revenue from both segments is generated by transporting, or arranging for the transportation of, freight for customers, and is predominantly affected by the rates per mile received from our customers and similar operating costs. For the years ended December 31, 2008, 2007 and 2006, Trucking base revenue represented 95.8%, 97.7% and 96.2% of total base revenue, respectively, with remaining base revenue being generated through Strategic Capacity Solutions.

We generally charge customers for our services on a per-mile basis. The main factors that impact our profitability on the expense side are the variable costs of transporting freight for our customers. The variable costs include fuel expense, insurance and claims, and driver-related expenses, such as wages, benefits, training and recruitment.

Trucking. Trucking includes the following primary service offerings provided to our customers:

• General Freight. Our General Freight service offering provides truckload freight services as a short- to medium-haul common carrier. We have provided General Freight services since our inception and we derive the largest portion of our revenues from these services. Beginning with the first quarter of 2008, we began including our regional freight operations as part of our General Freight service offering for reporting purposes. Regional freight refers to truckload freight services that involve a length-of-haul of approximately 500 miles or less.

• Trailer-on-Flat-Car. During December 2007, we began including rail intermodal service revenue to the extent Company equipment is used in providing the service. Our Trailer-on-Flat-Car service offering provides our customers cost savings over General Freight with a transit speed slightly slower. It also allows us to reposition our equipment to maximize our freight network yield.

• Dedicated Freight. Our Dedicated Freight service offering is a variation of our General Freight service, whereby we agree to make our equipment and drivers available to a specific customer for shipments over particular routes at specified times. In addition to serving specific customer needs, our Dedicated Freight service offering also aids in driver recruitment and retention.

Strategic Capacity Solutions. Strategic Capacity Solutions includes the following primary service offerings provided to our customers:

• Container-on-Flat-Car. During December 2007, we began including rail intermodal service revenue to the extent Company equipment is not used in providing the service. Our Container-on-Flat-Car service offering matches customer shipments with available containers of other carriers when it is not feasible to use our own equipment.

Our Strategic Capacity Solutions service offerings provide services that complement our Trucking operations. We provide these services primarily to our existing Trucking customers, many of whom prefer to rely on a single carrier, or a small group of carriers, to provide all of their transportation needs. To date, a majority of the customers of Strategic Capacity Solutions have also engaged us to provide services through one or more of our Trucking service offerings.

During December 2007, we also began offering rail intermodal services. Intermodal shipping is a method of transporting freight using multiple modes of transportation between origin and destination, with the freight remaining in a trailer or special container throughout the trip. Our rail intermodal service offerings involve transporting, or arranging the transportation of, freight on trucks to a third party who uses a different mode of transportation, specifically rail, to complete the other portion of the shipment. For the year ended December 31, 2008, rail intermodal service offerings generated approximately 1.2% of total base revenue.

Results of Operations

Executive Overview

In 2008, our base revenue grew 1.6%, our operating margin improved by 100 basis points and our net income and earnings per share grew from $140,000 and $0.01 per share to $3.1 million and $0.31 per share, respectively. We are proud of these improvements, but these results do not tell the full story about USA Truck's journey in 2008.

Last year can best be described by the word "change" - change in the global economy, domestic political change and change throughout USA Truck. It was a year in which we expanded exponentially our understanding of the freight transportation business and applied those lessons learned to change our operating model. We established a fresh strategic direction for USA Truck based on an in-depth study of the factors that drive shareholder value and operating performance in our industry.

VISION. Our primary long-term strategic objectives - to expand the value of our Common Stock through improved returns on capital and to improve the consistency of our earnings growth - precipitated the need to make two fundamental changes within our Company. First, deep organizational change was necessary to retool USA Truck to maximize returns on capital and de-emphasize our historical strategy to grow our tractor fleet. Second, a fresh operational approach was necessary to break our long-term addiction to long-haul freight and instead focus on freight network yield. A clear vision for USA Truck's future emerged in 2008.

PLANNING. Transforming that vision into results required a well-conceived plan. Our team went to work assessing marketplace realities and internal capabilities. We identified eight major initiatives that we believed were essential to effecting the fundamental change needed within the Company to achieve our long-term strategic objectives.

Our internal assessment indicated needs for a stronger technology platform and more effective personnel capabilities. Two initiatives were designed to turn those opportunities into competitive advantages.

1. Project Tech. For a variety of reasons, our legacy mainframe computer platform had become a competitive disadvantage for us. To bolster our ability to support the more rapid decision-making that our evolving business model demands, we began a three-year process to migrate our legacy mainframe platform and internally-developed software applications to server-based platforms. We will purchase off-the-shelf products for our core software needs, and develop value-added decision-support software applications internally.

2. Project People. We recognize that aligning the interests and efforts of every employee at USA Truck is essential to achieving our long-term strategic objectives. During 2008, we instituted several programs designed to create that alignment. From job descriptions to performance evaluations to talent management, we have challenged, empowered and rewarded our employees for performance. We endeavored last year to improve the productivity of our non-driver personnel by using a combination of performance-driven management and a more focused, process-driven approach to managing our business. We believe that is the best path to service our customers, produce results for our stockholders and reward our employees.

3. Project Velocity. The marketplace for truckload freight has changed. The proliferation of retail distribution centers and the growing rail intermodal market share in long-haul lanes have decreased truckload freight volume in those long-haul lanes. The marketplace is forcing truckload carriers into shorter-haul markets, but operational execution in those markets is very challenging and requires tremendous intensity and discipline. Though we are targeting network yield (not length-of-haul), we recognize that our model will be shorter-haul biased simply because that market is where the freight volumes are. Thus, it was imperative for us to prepare the Company to execute in the shorter-haul environment. We define "Velocity" as the measure of the number of times we load our fleet each week. Our Project Velocity was designed to do just that, and it produced encouraging results. During 2008, we improved our velocity 8.6% while shortening our length-of-haul 8.4% from 784 miles to 718 miles, and we did it while improving our empty mile percentage by 40 basis points from 11.1% to 10.7%.

4. Yield Management. The concept of freight network yield was foreign to us prior to 2008, so it was necessary to launch an initiative to educate our people about yield and to start incorporating it into our business processes and performance measurements. Our Yield Management initiative laid the foundation for the development of our defined freight network. While yield is not driven exclusively by pricing, we were able to increase our Trucking base revenue per total mile by 1.9% during 2008. We also reduced our tractor fleet by approximately 250 tractors during the fourth quarter to help us maintain that pricing level. We are committed to managing our freight operations to maximize yield.

5. Cost Discipline. USA Truck has long been an industry leader in operating cost per mile. However, cost is such a critical component for network yield that we revisited our entire cost structure during 2008. We now manage costs weekly, and we look at it in two buckets: variable costs per mile and total fixed costs. Our primary goal is obviously to keep costs as low as possible, but we also want to improve the flexibility within the cost structure so it can be quickly adjusted as economic conditions change. For example, we reduced our driver pay scale for new-hires twice last year, which resulted in a significant cost reduction in 2008 compared to 2007. We have also devoted considerable attention to fuel costs, to gross margins in our asset-light service offerings and to an assortment of fixed costs including non-driver wages (which we reduced considerably throughout the year as we trimmed non-driver headcount by 18.7%).

6. War on Accidents. Another area where we see potential for meaningful cost reduction is insurance and claims. Our approach to safety is simple: hire better drivers, train them better and hold them accountable for performance. There are many moving parts to this initiative, but the basic formula is working. During 2008, our accident frequency declined 17.1%, leading to a 70 basis point reduction in overall insurance and claims expense.

Bringing our freight network design to life and successfully implementing all of the above six initiatives will be quite an accomplishment, but it will not be enough for us to consistently grow our earnings or to produce returns on capital exceeding our cost of capital through the ups and downs of our cyclical industry. Nor will those initiatives provide the integrated bundle of services that our customers will demand.

That is why our plan calls for more than just asset-based truckload services. That is why we have launched two asset-light initiatives through our Strategic Capacity Solutions operating segment that are designed to boost our returns on capital, to provide another source of sustainable earnings growth and to offer our customers flexible capacity for their transportation needs in a variety of service and cost levels.

7. Rail Intermodal Service Launch. In late December 2007, we moved our first load of rail intermodal freight. During 2008, we produced base revenue of $4.6 million, more than doubling our goal of $2.0 million for 2008. We remain on the steep slope of the learning curve, but we are committed to further incorporating intermodal into our trucking operations to make the integration as seamless as possible for our customers as 2009 unfolds.

Our new strategic direction, objectives and supporting initiatives are part of a long-term strategic plan that we call VEVA (Vision for Economic Value Added). VEVA is a detailed, quarter-by-quarter operating plan designed to expand our Common Stock valuation multiples to the mean of our truckload peer group by the end of 2010 (Phase I) by earning a 10% return on capital and simultaneously driving our weighted average cost of capital below 10%. By 2013, VEVA calls for the expansion of our Common Stock valuation multiples beyond our truckload peer group's mean by sustaining or improving our capital management targets and leveraging a more diversified business model to produce a 10% compounded annual earnings growth rate (Phase II).

EXECUTION. VEVA is clearly an ambitious plan. We subscribe to the old adage that "the devil is in the details." While the plan is aggressive, we believe that it is achievable. Our success depends on our ability to execute.

Strategic plans do not execute; people do. We have painstakingly identified the key performance indicators (KPI) for VEVA, set targets for each of them and assigned ownership to individual employees who have accepted responsibility for them and are held accountable for results daily. Executive management is providing resources, removing barriers and working closely with middle management and front-line personnel to ensure that those targets are met. While the returns on capital and earnings growth goals are ambitious, the individual KPI targets are reasonable. By focusing on those individual KPI targets, we believe that we can reach our long-term strategic objectives.

Economic factors will play a big role in determining when we reach those objectives. The last quarter of 2008 into the early months of 2009 was the most difficult operating environment that we have ever seen. Not only have the challenging conditions made it difficult to make the changes to our operating model that VEVA demands, but it has also consumed our time and resources because of the hands-on management required to navigate through it.

The economic recession could delay the timeframes set forth by VEVA, but it has not changed our strategic direction. We are pleased with the progress we have made operationally and culturally, and we believe that our strong balance sheet and cash flow will serve us well during these turbulent times.

Note Regarding Presentation

By agreement with our customers, and consistent with industry practice, we add a graduated surcharge to the rates we charge our customers as diesel fuel prices increase above an agreed upon baseline price per gallon. The surcharge is designed to approximately offset increases in fuel costs above the baseline. Fuel prices are volatile, and the fuel surcharge increases our revenue at different rates for each period. We believe that comparing operating costs and expenses to total revenue, including the fuel surcharge, could provide a distorted comparison of our operating performance, particularly when comparing results for current and prior periods. Therefore, we have used base revenue, which excludes the fuel surcharge revenue, and instead taken the fuel surcharge as a credit against the fuel and fuel taxes and purchased transportation line items in the table setting forth the percentage relationship of certain items to base revenue below.

We do not believe that a reconciliation of the information presented on this basis and corresponding information comparing operating costs and expenses to total revenue would be meaningful. Data regarding both total revenue, which includes the fuel surcharge, and base revenue, which excludes the fuel surcharge, is included in the consolidated statements of income included in this report.

Base revenues from our Strategic Capacity Solutions operating segment, consisting primarily of base revenues from our Freight Brokerage service offering, have fluctuated in recent periods. This service offering does not involve the use of our tractors and trailers. Therefore, an increase in these revenues tends to cause expenses related to our operations that do involve our equipment-including fuel expense, depreciation and amortization expense, operations and maintenance expense, salaries, wages and employee benefits and insurance and claims expense-to decrease as a percentage of base revenue, and a decrease in these revenues tends to cause those expenses to increase as a percentage of base revenue with a related change in purchased transportation expense. Since changes in Strategic Capacity Solutions revenues generally affect all such expenses, as a percentage of base revenue, we do not specifically mention it as a factor in our discussion of increases or decreases in those expenses in the period-to-period comparisons below. Base revenues from our Strategic Capacity Solutions operating segment increased approximately 80.9% from December 31, 2007 to December 31, 2008. However, base revenues from our Strategic Capacity Solutions operating segment represented only 4.2%, 2.3% and 3.8%, of total base revenue for the years ended December 31, 2008, 2007 and 2006, respectively.

Relationship of Certain Items to Base Revenue

The following table sets forth the percentage relationship of certain items to
base revenue for the years indicated. The period-to-period comparisons below
should be read in conjunction with this table and our consolidated statements of
income and accompanying notes.



                                              Year Ended December 31,
                                             2008        2007      2006
Base revenue                                100.0 %     100.0 %   100.0 %
Operating expenses and costs:
Salaries, wages and employee benefits        39.7        41.5      39.7
Fuel and fuel taxes (1) (2)                  13.8        16.3      15.8
Depreciation and amortization                12.8        12.4      12.1
Purchased transportation (2)                  9.2         4.4       4.5
Insurance and claims                          7.3         8.0       7.0
Operations and maintenance                    7.0         6.6       5.6
Operating taxes and licenses                  1.5         1.6       1.7
Litigation verdict                             --         1.2        --
Communications and utilities                  1.0         1.0       0.9
Gain on disposal of revenue equipment, net     --       (0.1)     (0.1)
Other                                         4.6         5.0       5.9
Total operating expenses and costs           96.9        97.9      93.1
Operating income                              3.1         2.1       6.9
Other expenses:
Interest expense                              1.2         1.3       1.1
Other, net                                     --          --        --
Total other expenses, net                     1.2         1.3       1.1
Income before income taxes                    1.9         0.8       5.8
Income tax expense                            1.1         0.8       2.6
Net income                                    0.8 %        -- %     3.2 %

(1) Net of fuel surcharges.

(2) In 2008, the Company allocated fuel surcharge revenue to the Trucking and the Strategic Capacity Solutions operating segments. For purposes of this table, fuel surcharge revenue is netted against fuel and fuel taxes and purchased transportation expense. Percentages for 2007 and 2006 have been recalculated to reflect this reclassification.

Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007

Results of Operations - Combined Services

Our base revenue grew 1.6% from $391.2 million to $397.6 million, for the reasons addressed in the Trucking and the Strategic Capacity Solutions sections, below.

Net income for all divisions was $3.1 million as compared to $0.1 million for 2007.

Overall, our operating ratio improved by 1.0 percentage points of base revenue to 96.9% as a result of the following factors:

• Salaries, wages and employee benefits decreased by 1.8 percentage points of base revenue due to a 160.5% increase in the average number of owner-operators and a 3.8% increase in base revenue per mile. If we are able to continue to increase owner-operators as a percentage of our total fleet, we would expect salaries, wages and employee benefits would continue to decrease as a percentage of base revenue absent offsetting increases in those expenses.

• Fuel and fuel taxes decreased by 2.5 percentage points of base revenue primarily due to a 7.8% decrease in the net price paid for diesel fuel, a 1.1 percentage point decrease in out-of-route miles and, as mentioned above, an increase in the average number of owner-operators, which bear their own fuel expenses.

• Operations and maintenance increased by 0.4 percentage points of base revenue as direct repair costs on our tractors and trailers increased 5.0% due to a 7.1% increase in the average age of the tractor fleet for the year from 22.1 months in 2007 to 23.7 months in 2008 and a 30.5% increase in the average age of the trailer fleet for the year.

• Purchased transportation increased by 4.8 percentage points of base revenue due primarily to the increase in carrier expense associated with our Strategic Capacity Solutions operating segment and the above-mentioned increase in owner-operator tractors. We expect this expense will continue to increase when compared to prior periods if we can achieve our goals to grow our owner-operator fleet and increase the revenue of our Strategic Capacity Solutions operating segment.

• Other operating expenses decreased by 0.4 percentage points of base revenue primarily due to a decrease in driver recruiting costs of 13.8%. The reduction in driver recruiting costs resulted from lower driver turnover (-8.3%) and an accommodating market for hiring drivers.

• Our effective tax rate decreased from 95.6% in 2007 to 57.4% in 2008. Income tax expense varies from the amount computed by applying the federal tax rate to income before income taxes primarily due to state income taxes, net of federal income tax effect and due to permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Due to the partially nondeductible effect of per diem payments, our tax rate will vary in future periods based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure.

Results of Operations - Trucking

Key Operating Statistics:



                                                                             Fiscal Year Ended December 31,
                                                                                 2008                2007
Total miles (in thousands) (1)                                                     294,248         300,577
Empty mile factor (2)                                                                 10.7 %          11.1 %
. . .