RUSH ENTERPRISES INC \TX\, 10-K, 1999-03-31

RUSH ENTERPRISES INC \TX\
10-K, 1999-03-31
AUTO DEALERS & GASOLINE STATIONS

Previous: CHARTWELL RE HOLDINGS CORP, 10-K405, 1999-03-31

Next: SEALED AIR CORP/DE, DEF 14A, 1999-03-31

<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998

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 26, 1999 was approximately
$33,032,000, based upon the last sales price on March 26, 1999 on the NASDAQ
National Market for the Company's common stock. The registrant had 6,646,488
shares of Common Stock outstanding on March 26, 1999.

DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE
REGISTRANT'S 1999 ANNUAL MEETING OF SHAREHOLDERS, TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION NOT LATER THAN APRIL 30, 1999 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.

<PAGE> 2

RUSH ENTERPRISES, INC.

INDEX TO FORM 10-K

YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>

PAGE NO.
--------
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 34
Item 6. Selected Consolidated Financial Data 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 38
Item 7a. Quantitative and Qualitative Disclosures about Market Risks 50

Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 78

PART III

Item 10. Directors and Executive Officers of the Registrant 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners and Management 78
Item 13. Certain Relationships and Related Transactions 78

PART V

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 79
</TABLE>

<PAGE> 3

Certain statements contained in this Form 10-K are "forward-looking
statements" within the meaning of the Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Exchange Act of 1934, as amended.
Specifically, all statements other than statements of historical fact included
in this Form 10-K regarding the Company's financial position, business strategy
and plans and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to 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 view of the Company with respect
to future events and are subject to certain 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 the Company's Registration Statement on Form S-1 (File
No. 333-3346) and in the Company's annual, quarterly and other reports filed
with the Securities and Exchange Commission (collectively, "cautionary
statements"). Although the Company believes that its expectations are
reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company 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. The Company was incorporated in Texas 1965 and
currently consists of two reportable segments: the Heavy Duty Truck segment, and
the Construction Equipment segment.

GENERAL

The Heavy Duty Truck segment 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

<PAGE> 4

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 the United States, representing approximately 19.5% of
all new Peterbilt truck sales in 1998, 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.

The Construction Equipment segment, formed during 1997, operates
full-service John Deere dealerships in Texas and Michigan. Dealership operations
include the retail sale of new and used equipment, after-market parts and
service facilities, equipment rentals, and the financing of new and used
equipment. The Company believes the construction equipment industry is
highly-fragmented and offers opportunities for consolidation. As a result, the
Company's growth strategy is to realize economies of scale, favorable purchasing
power, and cost savings by continuing to develop a network of John Deere
dealerships through acquisitions and growth inside existing territories.

During 1998, the Company developed the Rush Retail Centers division and
acquired the stock of D & D Farm and Ranch Supermarket, Inc. (D&D). D&D operates
a retail farm and ranch superstore in the greater San Antonio area. D&D is a
virtual one-stop shopping center for farm and ranch supplies with wide array of
products including horse tack, saddles, western-wear, veterinarian supplies,
fencing, gates, and cattle shoots, guards and trailers. The Company believes
that D&D is the only store of its kind and offers opportunities for expansion.
As a result, the Company's growth strategy is to open new D&D stores in existing
farm and ranch territories. During 1998, D&D's operations were immaterial to the
Company's results of operations representing less than 2.5% of total sales and
less than 1.0% of operating income.

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.

<PAGE> 5

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 $110,000 and negotiated sales prices for
new Peterbilt trucks generally range from $65,000 to $115,000, 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 1,600 dealerships nationwide, including 80 Peterbilt dealers operating
201 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 1998 new heavy-duty
truck sales in the United States were 212,602 units, increasing by 15.4% from
the 184,211 units sold in 1997. Annual domestic retail heavy-duty truck sales
have averaged approximately 195,950 units for the five years ended December 31,
1998. New Peterbilt truck registrations during the calendar year ended December
31, 1998 were 21,619, for a national market share, based on new truck
registrations, of 10.2%. In the Company's eleven primary market areas 20,424 new
heavy-duty trucks were registered in 1998, 4,096 of which were new Peterbilts,
resulting in an average market share for Peterbilts of 20.1%.

<PAGE> 6

and related product support to its customers. Its primary products include John
Deere backhoe loaders, hydraulic excavators, crawler dozers, and four-wheel
drive loaders. Industry-wide negotiated sales prices for this type of equipment
generally range from $20,000 to $350,000.

The United States construction equipment industry is highly fragmented
with over 90 John Deere dealers nationwide, operating 410 locations. New
construction equipment sales historically have shown a high correlation to the
rate of change in industrial production and gross domestic product. In the
Company's primary market area (Houston) 2,667 new construction equipment units
were sold in 1998, 435 of which were manufactured by John Deere, resulting in an
average market share for John Deere of 16.3%.

BUSINESS STRATEGY

Heavy Duty Truck Segment

The Company's business strategy for the Heavy Duty Truck segment 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, 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 its wholly
owned subsidiary, 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, three of which are
open 24 hours a day, five 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

<PAGE> 7

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 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 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 and correct 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. In 1995, the Company has began 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 all locations are branded Rush Truck Centers.

Expansion in Existing and New Territories. Since 1990, the Company has
opened eight facilities in its existing and new territories, including a used
truck sales lot in Austin, Texas and a combination full-service truck and
construction equipment dealership in Beaumont, Texas during 1998. 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. During 1999, management plans to expand
its existing full service dealership in Fontana, California, relocate and expand
its existing parts facility in Southern California into a full service
dealership, relocate and expand its Houston, Texas and Laredo, Texas
dealerships.

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

<PAGE> 8

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 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 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 purchase 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, through March
1999. The Company paid the principal of Denver Peterbilt, Inc. $2.0 million in
March 1999 satisfying all terms of the agreement.

Any prospective heavy-duty truck 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 of a heavy-duty truck dealership.

Construction Equipment Segment

The Company currently operates full-service John Deere dealerships in Texas and
Michigan. Due to the highly fragmented nature of the construction equipment
industry, the Company perceives an opportunity to grow its integrated
full-service dealer network to market John Deere construction equipment and
related services in the United States. The Company intends to take advantage of
this

<PAGE> 9

opportunity by duplicating the business strategy that it utilized to create its
network of Heavy Duty Truck dealerships. This business strategy has allowed the
Company to achieve significant market penetration within both existing and new
market areas for its Heavy Duty Truck segment. In attempting to duplicate this
business strategy in its Construction Equipment segment, the Company intends to
make strategic acquisitions of additional John Deere construction equipment
dealerships in new territories and grow facilities and sales in existing
territories. The Company's objective is to establish itself as a leading dealer
of construction equipment and related services by emphasizing the following key
elements of its business strategy.

One-Stop Center. The Company is developing a "one-stop equipment
center" where customers can purchase new John Deere or used construction
equipment, lease and rent John Deere construction equipment, as well as purchase
after-market parts and accessories and have virtually any kind of construction
equipment serviced by factory-certified technicians, all at one convenient
location. Additionally, the equipment centers operate a fleet of field service
technicians that perform repair and maintenance services at the customer's
location. Rush Equipment Centers are the sole authorized vendor for new John
Deere construction equipment and replacement parts in their market areas and
have expansive parts departments that display many of the parts in an open
showroom 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 new or used equipment, as well as equipment leasing and
rentals. The continued implementation and enhancement of its one-stop equipment
center concept is an integral element of the Company's business strategy.

Dealership Network. The Company believes that building a large
multi-state, full-service network of construction equipment dealerships will
provide economies of scale that will lead to superior purchasing power,
favorable financing terms and cost savings from centralized management.
Furthermore, the Company believes that the similarities between the Heavy Duty
Truck segment and the Construction Equipment segment will create synergies that
will benefit both segments. Approximately 40% of the Company's heavy duty truck
customers in the Houston market are involved in businesses that use construction
equipment and regularly purchase and rent construction equipment, parts and
service. Management believes that strong customer relationships developed in the
Heavy Duty Truck segment will benefit the Construction Equipment segment in its
early stages.

The Company believes that by establishing a geographically diverse
construction equipment dealership network, that the associated growth of
equipment related services, including financial services, renting, service, and
parts, will reduce cyclicality in the Company's operations. Furthermore, such
geographic diversification would support the sale of used equipment retired from
the rental fleet through the ability to relocate used equipment to various
geographic regions based on market demand, the access to an expanded customer
base, and the availability of trained personnel to service the used equipment to
enhance its resale value.

Rush Equipment Center Development. The Company is also applying its
branding program for its facilities to the Construction Equipment segment,
designating each facility as a Rush

<PAGE> 10

Equipment Center through distinctive signage and marketing programs to enhance
its name recognition and to communicate the standardized high level of quality
products and services. The Company believes the Rush Equipment Center strategy
will increase its market recognition and intends to establish any newly acquired
facilities as Rush Equipment Centers.

Expansion by Acquisition. The Company acquired its first full-service
equipment center in October of 1997, opened a full-service equipment center in
Beaumont, Texas in July 1998, and acquired another full-service equipment
center, with four locations, in western Michigan in September 1998. 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 any acquired dealers through economies of
scale, sophisticated management information systems, purchasing power,
merchandising capability and the introduction of enhanced financial services and
products.

In October 1997, the Company purchased certain assets and assumed
certain liabilities of C. Jim Stewart & Stevenson, Inc., which consisted of one
full-service John Deere dealership in Houston, Texas. The acquisition provides
the Company with an immediate presence in the construction equipment industry in
the state of Texas. The purchase price was approximately $30.2 million, funded
by (i) $4 million of cash, (ii) $21.1 million of borrowings under the Company's
floor plan financing arrangement with Associates Commercial Corp. and John Deere
Inc., (iii) $3,080,000 in real estate borrowings from the Company's primary
commercial lending institution, and (iv) a $2,062,500 promissory note payable to
the seller.

In September 1998, the Company purchased substantially all of the
assets of Klooster Equipment, Inc. which consisted of three full-service
dealerships and one retail only location covering 54 counties in Western
Michigan. The acquisition provides the Company with an immediate presence in the
construction equipment industry in the state of Michigan. The purchase price of
approximately $13.1 million was funded by (i) $2.5 million of cash, (ii) $9.8
million of borrowings under the Company's floor plan financing arrangements with
Associates Commercial Corp. and John Deere Inc., and (iii) $836,000 of
borrowings from John Deere Credit Corp.

Any prospective construction equipment store acquisition which the
Company may be able to negotiate would require the willingness of John Deere,
Inc., to accept the Company as a John Deere 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. There can be no assurances that
the Company will continue to successfully establish a construction equipment
center dealership network, that it will be able to acquire additional
construction equipment dealerships, or that if such dealerships are acquired or
such network is created, that the Company will be able to successfully achieve
economies of scale and improved operating results of such acquired dealerships.

<PAGE> 11

TRUCK CENTERS

The Company currently operates twelve 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 four 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 facilities offer a
variety of product and service combinations in areas of the Company's markets to
maximize market coverage. Three of the Company's truck centers are open 24 hours
a day, five days a week for parts and services. Recently, the Company opened a
used truck sales lot in Austin, Texas, and its first combined Peterbilt and John
Deere dealership in Beaumont, Texas. Management intends to expand its existing
full service dealership in Fontana, California, relocate and expand its existing
parts facility in Southern California into a full service dealership, relocate
and expand its Houston, Texas, Laredo, Texas, and Tulsa, Oklahoma dealerships.

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 are
determined by market needs.

<PAGE> 12

Set forth below is a summary description of each the Company's heavy
duty truck 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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Antonio, TX....... 1968 Start-up O O O O O(8) 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(9)......... 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(13)....... 1994 Acquisition O O O O O O
Tulsa, OK(9).......... 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)...................
Rio Grande Valley, 1997 Start-up O O O O O
TX(10)..............
Austin, TX(11)........ 1998 Start-up O O
Beaumont, TX(12)...... 1998 Start-up O O O O
Planned Truck Centers
Southern CA(5)........ 1999 Start-up O O O O
Expanded Facilities
Houston, 1998 Start-up O O O O O O
TX(1)....................
</TABLE>

- --------------
(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 has begun construction on a facility that
will relocate the dealership, parts and service, leasing and renting
and finance and insurance facilities to a single 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 1999.

(6) Body shop completed in mid 1997.

(7) The acquisition of the Denver, Colorado and Greeley, Colorado locations
was completed in March 1997. The Company started leasing and rental and
finance and insurance operations during 1997.

(8) The Company opened leasing and rental operation in San Antonio, Texas
during 1997.

(9) The Company currently plans to relocate and expand this dealership
during 1999.

(10) The Company completed construction and opened a full-service
dealership, including leasing and rental in late 1997.

(11) The Company opened a used truck sales lot in mid 1998.

(12) The Company opened a combination heavy duty truck and construction
equipment dealership in mid 1998.

(13) The Company currently plans to expand the dealership, including
building of a state of the art body shop.

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-

<PAGE> 13

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
55.8% of total revenues in 1998.

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 $110,000, 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 65% 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 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 1998, approximately 70% of
the Company's truck sales were to repeat customers. The Company sold 4,315 new
trucks in 1998 compared with 3,040 in 1997.

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 80% 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.

<PAGE> 14

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 transferable 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 2,087 used trucks
during 1998 compared with 1,952 in 1997.

CONSTRUCTION EQUIPMENT SALES

New Equipment Sales. The Rush Equipment Centers sell new equipment under the
John Deere nameplate primarily in the construction industry. John Deere has a
reputation of producing premium-quality, skillfully designed equipment. John
Deere's premium reputation is an important aspect of the Company's marketing of
new and used equipment and management believes that such reputation results in
relatively higher prices for used John Deere equipment.

Customers of the Company's Construction Equipment segment include contractors,
for both residential and commercial construction, utility companies, federal,
state and local government agencies, and various petrochemical, industrial and
material supply type businesses that require construction equipment in their
daily operations. The Construction Equipment segment provides a full line of
equipment for light to medium size applications and related product support to
its customers. Its primary products include John Deere backhoe loaders,
hydraulic excavators, crawler dozers, and four-wheel drive loaders. While the
sale of new John Deere construction equipment is the main focus, the Rush
Equipment Center construction equipment store also offers complementary
equipment from other manufacturers, as well as used equipment taken as
trade-ins.

A new John Deere piece of construction equipment typically ranges in price from
$20,000 to $350,000. The Company aggressively markets to regional fleets and
current truck customers that use construction equipment. An important
competitive issue for the Company's customers is asset management. The
availability of a well maintained rental fleet allows customers manage their
assets by obtaining equipment on an as needed basis. Additionally, management
believes

<PAGE> 15

John Deere equipment, due its premium reputation and quality, provides lower
maintenance and repair costs over its useful life, and provides a higher
residual value at trade-in. The Company sold 247 new construction equipment
units during the year ended December 31, 1998.

Used Equipment Sales. The Company sells used construction equipment of numerous
manufacturers, including John Deere, Caterpillar, Komatsu and Case. The Company
believes that future geographic diversification and the establishment of a well
maintained rental fleet will be key in the marketing of used equipment and will
afford the Company the ability to utilize additional parts and service
departments for the reconditioning of used equipment, and to shift used
equipment from location to location to satisfy customer demand. Management
expects the majority of the used equipment inventory will be derived from the
rental fleet, and the remainder to be taken as trade-ins from new equipment
customers.

The Company's used equipment sales staff is trained to evaluate each prospective
unit of used equipment on the basis of wholesale value and the costs of
delivery, reconditioning and otherwise making the equipment ready for sale. The
Company utilizes its on-site parts and service facilities to perform such
reconditioning services. Unlike new equipment, the majority of the Company's
used equipment is sold "as is" and without manufacturer's warranty, although
manufacturers sometimes provide limited warranties on used equipment if the
manufacturer's warranty is transferable and has not yet expired.

The Company closely monitors the age and quality of its used equipment inventory
to maximize inventory turnover, avoid overstock and understock situations and to
satisfy customer demand. The Company sold approximately 120 used construction
equipment units during the year ended December 31, 1998.

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 trucks and construction equipment. The Company also offers truck
leasing and rentals at five of its locations and maintains a rental fleet at its
equipment center. Revenues from truck related financial services were $9.1
million or 1.5% of total revenues in 1998 compared to $4.7 million or 1.2%, of
total revenues in 1997.

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 America, and PACCAR Financial,
financed approximately $183.6 million of new and used truck purchases by
customers in 1998, an increase of 100.9% from the $91.4 million financed in
1997. The Company is one of the largest originators of Class 8 heavy-duty truck
loans for Associates. 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.

<PAGE> 16

During 1998, the Company arranged customer financing for approximately
43.4% of its total new and used truck sales, and derived approximately 64% and
36% of its finance revenues from the sale of new and used trucks, respectively.
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 truck financing opportunities in Texas, Oklahoma, Colorado, and Louisiana to
Associates and its truck financing opportunities in California to both
Associates and PACCAR Financial. Approximately 80% of the principal amount
financed by the Company under installment contracts during 1998 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 .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 maximum recourse liability.

NEW AND USED EQUIPMENT FINANCING. Each new and used equipment customer
is directed by the Company's equipment sales staff to the Company's financial
services sales personnel. The Company, through The CIT Group, Associates
Commercial Corp., and John Deere Credit, financed approximately $15.7 million of
new and used equipment purchases by customers during the 1998. Revenues from
construction equipment related financial services were approximately $603,000
during 1998.

During 1998, the Company arranged customer financing for approximately
44.4% of its total new and used equipment sales, with approximately 70% related
to new equipment sales and the remaining 30% of financing related to used
equipment sales. The financings are typically installment or lease contracts,
which are secured by the equipment financed, and generally require a down
payment of 0% to 7%, with the remaining balance financed over three to five
years. The Company presents all of its equipment financing opportunities to The
CIT Group, Associates Commercial Corp., and John Deere Credit, (Finance
Providers). The Company's contract with

<PAGE> 17

the Finance Providers 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.
The Company has been able to negotiate favorable discount rates with the Finance
Providers because of its reputation in truck financing and performance.

The Finance Providers 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 the Finance Providers and determines
whether they are agreeable to completing the financing on such terms. All
finance contracts are sold to the Finance Providers without recourse.

Truck Leasing and Rental. The Company engages in full-service Peterbilt
truck leasing under the PacLease trade name at eight 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 667 trucks at December 31, 1998. The Company owns approximately
17% of its lease and rental fleet, and approximately 83% 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 profitability.

The Company offers both long-term leasing and short-term rentals to its
customers. Approximately 68% of the Company's fleet is leased to customers for
periods ranging from one to seven 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 28 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.

Equipment Rental. The Company engages in full-service John Deere
equipment rental. Under the terms of a full-service rental contract, all parts
sales, service and maintenance for the rental equipment is performed at the
Company's facilities. The Company's rental fleet consists of approximately 95
units as of December 31, 1998.

The Company offers both long-term and short-term rentals, and rental
purchase options to its customers. Management believes that its rental
operations will continue to benefit from the trend among businesses to outsource
operations, including equipment ownership, in order to minimize their capital
investment in equipment, as well as reducing or eliminating the down-time,
maintenance, repair and storage costs associated with equipment ownership. The
Company constantly monitors the age of its rental fleet, and as equipment is
taken out of the rental fleet,

<PAGE> 18

new equipment is added as needed. The average age of equipment in the rental
fleet is eight months. Management believes that building a geographically
diverse network of equipment centers would support the sale of used equipment
retired from the rental fleet through the ability to relocate used equipment to
various geographic regions based on market demand, the access to an expanded
customer base, and the availability of trained personnel to service the used
equipment to enhance its resale value.

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 eight 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 87% during 1998.

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 and equipment sales. Parts, service and body shop revenues accounted for
approximately $108.0 million, or 17.6%, of the Company's total revenues in 1998.

Parts

Each Rush Truck Center carries a wide variety of Peterbilt and other
parts inventory, with an average of approximately 5,000 items from over 50
suppliers at each location. The Company is the sole authorized Peterbilt parts
and accessories supplier in each of its markets and estimates that approximately
65% of its truck service and parts functions are performed on Peterbilt
heavy-duty trucks.

<PAGE> 19

The Rush Equipment Center carries a wide variety of John Deere and
other parts inventory, with over 12,000 items from over 15 suppliers. The
Company is the sole authorized John Deere parts and accessories supplier in its
market and estimates that approximately 92% of its construction equipment
service and parts functions are performed on John Deere equipment.

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 and equipment for resale and maintain and repair the Company's lease
fleets. In addition to supporting the Company's service and body shop functions,
the Company markets its parts and accessories both at its truck and equipment
centers, and through its outside sales staff. The Company's outside sales staff
markets parts directly to fleet customers, who often perform truck and equipment
maintenance and repairs at their own in-house service facilities.

The Company's real-time inventory management tracking systems reduces
delays in parts delivery, helps maximize inventory turns and assists in
controlling the potential of overstock and understock situations. The Company's
inventory systems also assist 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 and the equipment 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 for truck parts and a 90 day
replacement guarantee for construction equipment component parts.

The Company displays many of its higher margin truck 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 the Company's 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.

<PAGE> 20

The Company has a total of 409 service bays, including 13 paint bays,
throughout its heavy-duty truck 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 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, three of which are open
24 hours a day, five 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.

The equipment center maintains a fully equipped service facility
capable of handling almost any type of equipment repair on virtually any type of
equipment. Services range from rebuilding engines to routine maintenance
functions, including tune-ups, oil changes, etc. The equipment center includes
service bays staffed by highly trained service technicians, as well as a fleet
of field service trucks and technicians who make on-site repairs at the
customers location. The equipment center is a John Deere designated warranty
service center and technicians receive training from John Deere and certain
other suppliers, as well as additional on-site training conducted by the
Company. 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 John Deere.

<PAGE> 21

SALES AND MARKETING

The Company's aggressive expansion program and long history of
operations in the heavy duty truck segment 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 9% of
its total sales in 1998. 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 1998, approximately 70% 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 employed a Rush Truck Center branding
program for its truck facilities to enhance the Company's name recognition and
to communicate the standardized high level of quality products and services
throughout its truck center network. Currently all of the Company's Peterbilt
dealerships are branded as Rush Truck Centers.

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 55,000
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 155 employees,
including a Senior Vice President of Sales and Marketing and ten regional sales
managers. Used trucks are sold through 45 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 694 parts and service employees,
including a Senior Vice President of Dealership Operations, a national director
of parts, a national director of service and body shop operations, 22 regional
service and body shop managers and 15 regional parts

<PAGE> 22

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.

The equipment centers' customer base includes contractors, for both
residential and commercial construction, utility companies, federal, state and
local government agencies, and various petrochemical, industrial and material
supply type businesses that require construction equipment in their daily
operations, none of which accounted for more than 4% of its total sales in the
fourth quarter of 1997. The creation of a network of equipment centers large
enough to handle large fleet sales nationwide would build economies of scale
through favorable purchasing power and proportionately lower operating costs due
to centralized management. Currently, strong marketing efforts are being made to
truck customers who are involved in the construction business. Management
believes that these customers are familiar with the consistently reliable
service that is synonymous with the "Rush" name. As part of this strategy, the
Company has branded its Houston facility as a Rush Equipment Center in order to
enhance the Company's name recognition and to communicate the standardized high
level of quality products and services that can be expected when visiting the
Rush Equipment Center.

The equipment centers' staff consist of 145 employees, including a
President, three General Managers, and 15 department managers. New and used
equipment is sold, leased and rented through 38 sales personnel. The sales staff
at all Rush Equipment Centers receive sales training and instruction on
technical and operating aspects of the equipment and education with respect to
the industries in which such equipment is utilized, primarily the construction
and forestry industries. The sales staff is compensated on a commission and
salary basis, with a high percentage of compensation based on commission. The
equipment center has approximately 95 parts and service employees. The Company
sells parts in showrooms and at its parts counter at its equipment center and
directly to customers through its outside sales staff. The direct marketing to
its customers is intended to position the Company as the primary supplier of
parts to such customers, who often perform equipment maintenance and repairs at
their own in-house service facilities.

<PAGE> 23

FACILITY MANAGEMENT

Personnel. Each Rush Truck and the Equipment 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 and
the Equipment 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 their respective industries.

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 facility'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 12 years, and the average tenure of its current
truck centers' general managers is approximately 8 years. 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, John Deere 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 and equipment 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 Heavy Duty
Truck segment 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.

<PAGE> 24

The Company purchases all of its John Deere construction equipment
inventory and John Deere parts directly from John Deere. All other construction
equipment manufacturers' parts and accessories are purchased through wholesale
vendors by the Company. Management believes as the equipment center network of
dealerships is developed, the Company will be able to negotiate favorable price
terms through volume purchasing, and thereby achieve a competitive pricing
position in the industry.

Management Information Systems. Each Rush truck and equipment 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, GMC, and John Deere via real-time satellite or
frame relay 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

In September 1998, the Company purchased substantially all of the
assets of Klooster Equipment, Inc. which consisted of three full-service
dealerships and one retail only location covering 54 counties in Western
Michigan. The acquisition provides the Company with an immediate presence in the
construction equipment industry in the state of Michigan. The purchase price was
approximately $13.1 million funded by (i) $2.5 million of cash, (ii) $9.8
million of borrowings under the Company's floor plan financing arrangements with
Associates Commercial Corp. and John Deere Inc., and (iii) $836,000 of
borrowings from John Deere Credit Corp.

<PAGE> 25

On March 2, 1998, the Company caused its wholly owned subsidiary, Rush
Retail Centers of Texas, Inc., to acquire the stock of D&D Farm and Ranch
Supermarket, Inc. for approximately $10.5 million, with the purchase price being
a combination of cash and notes payable. The Company accounted for the
acquisition as a purchase.

In October 1997, the Company purchased certain assets and assumed
certain liabilities of C. Jim Stewart & Stevenson, Inc., and Stewart & Stevenson
Realty Corp., which consisted of one full-service John Deere dealership in
Houston, Texas. The acquisition provides the Company with an immediate presence
in the construction equipment industry in the state of Texas. The purchase price
was approximately $30.2 million, funded by (i) $4 million of cash, (ii) $21.1
million of borrowings under the Company's floor plan financing arrangement with
Associates Commercial Corp. and John Deere Inc., (iii) $3,080,000 in real estate
borrowings from Frost National Bank, and (iv) a $2,062,500 promissory note
payable to the seller.

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. The Company paid the principal
of Denver Peterbilt, Inc. $2.0 million in March 1999 satisfying all terms of the
agreement.

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 categories. Despite being what the Company believes to be one of
the largest heavy duty truck dealers in the industry in terms of total revenues,
during 1998 the Company accounted for approximately 2.0% of all new Class 8
truck sales in the United States.

The Company's heavy duty truck 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.

<PAGE> 26

The Company's construction equipment products compete with construction
equipment manufactured by Caterpillar, Komatsu, Case, and other manufacturers.
Management believes it is able to compete with other dealers and service
providers on the basis of overall John Deere 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.

DEALERSHIP AGREEMENTS

PACCAR. The Company has entered into non-exclusive dealership
agreements (the "Dealership Agreements") with PACCAR with respect to each of the
heavy duty truck territories. The Dealership Agreements each have current terms
expiring between March 2000 and October 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.

Each of the Company's truck 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

<PAGE> 27

1999. 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 (collectively, 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.

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; (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.

<PAGE> 28

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 at least 1999.

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.

John Deere. The Company has agreements with John Deere which authorizes
the Company to act as a dealer of John Deere construction, utility and forestry
equipment (the "Construction Dealer Agreement"). The Company's areas of
responsibility for the sale of John Deere construction equipment are the
Houston, Texas Metropolitan area and surrounding 20 counties and 54 counties in
Western Michigan that includes Lansing, Grand Rapids and Traverse City.

Pursuant to the Construction Dealer Agreements, the Company is
required, among other things, to maintain suitable facilities, provide competent
management, actively promote the sale of construction equipment in the
designated area of responsibility, fulfill the warranty obligations of John
Deere, maintain inventory in proportion to the sales potential in the area of
responsibility, provide service and maintain sufficient parts inventory to
service the needs of its customers, maintain adequate working capital, and
maintain stores only in authorized locations. John Deere is obligated to make
available to the Company any finance plans, lease plans, floor plans, parts
return programs, sales or incentive programs or similar plans of programs it
offers to other

<PAGE> 29

dealers. John Deere also provides the Company with promotional items and
marketing materials prepared by John Deere for its construction equipment
dealers. The Construction Dealer Agreements entitle the Company to use John
Deere trademarks and tradenames, with certain restrictions.

Under the Construction Dealer Agreements the Company cannot acquire
other John Deere dealerships without John Deere's prior written consent, which
John Deere may withhold in its sole discretion. The prior consent of John Deere
is required for the opening of any John Deere store within the Company's
designated area of responsibility and for the acquisition of any other John
Deere dealership. In addition, the Company is prohibited from making
acquisitions, initiating new business activity, paying dividends, repurchasing
its capital stock, or making any other distributions to stockholders if the
Company's equity-to-assets ratio is below 20%, as calculated by John Deere
pursuant to the provisions of the Construction Dealer Agreements, or if such
ratio would fall below 20% as a result of such action. As of the end of fiscal
1998, the Company's equity-to-assets ratio was 24%.

In the event of a change of control of the Company, the Dealership
Agreement may be immediately terminated by John Deere. For this purpose, a
change of control occurs (i) if the Rush Principals (collectively, W. Marvin
Rush, W. M. "Rusty" Rush, Robin M. Rush) 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 Rush Principals owns a greater
percentage of the capital stock entitled to vote on the election of directors of
the Company than the Rush Principals in the aggregate. In the event that the
Company were to find it necessary or advisable to sell any of its John Deere
dealership locations, John Deere 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's John Deere dealer appointment is not exclusive. John
Deere could appoint other dealers in close proximity to the Company's existing
store. The areas of responsibility can be reduced or terminated by John Deere
upon 120 days prior written notice. In addition, the Construction Dealer
Agreements can be amended at any time without the Company's consent, so long as
the same amendment is uniformly made to the dealer agreements of all other John
Deere dealers. John Deere also has the right to sell directly to federal, state,
or local governments, as well as national accounts. To the extent John Deere
appoints other dealers in the Company's market, reduces the area of
responsibility relating to the Company's construction equipment stores, or
amends the Construction Dealer Agreements or directly sells substantial amounts
of equipment to government entities and national accounts, the Company's results
of operations and financial condition could be adversely affected.

Other Suppliers. In addition to John Deere, the Company is an
authorized dealer for suppliers of other equipment. The terms of such
arrangements vary, but most of these dealership agreements contain termination
provisions allowing the supplier to terminate the agreement after a specified
notice period (usually 180 days).

<PAGE> 30

FLOOR PLAN FINANCING

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 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. At December 31, 1998, the Company's floor plan arrangements permit the
financing of up to 1,133 new trucks and 432 used trucks and, the Company had
approximately $45.9 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 62.5% 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.

Substantially all of the Company's new construction equipment purchases
are financed by John Deere and Associates Commercial Corp. The Company finances
all , or substantially all, of the purchase price of its new equipment inventory
under its floor plan facilities. The agreement with John Deere provides interest
free financing for five months after which time the amount financed is required
to be paid in full, or an immediate 3% discount with payment due in 30 days.
When the equipment is sold prior to the expiration of the five month period, the
Company is required to repay the principal within approximately 15 days of the
sale. Should the equipment financed by John Deere not be sold within the five
month period, it is transferred to the Associates Commercial Corp. floor plan
arrangement. The Company makes principal payments to Associates Commercial
Corp., for sold inventory, on the 15th day of each month . Used and rental
equipment, to a maximum of book value, is financed under a floor plan
arrangement with Associates Commercial Corp. The Company makes monthly interest
payment on the amount financed and is required to commence loan principal
repayments on rental equipment as book value reduces. Principal payments, for
sold inventory, on used equipment are made the 15th day of each month following
the sale. The loans are collateralized by a lien on the equipment. As of
December 31, 1998, the Company's floor plan arrangement with Associates
Commercial Corp. permit the financing of up to $25 million in equipment. At
December 31, 1998, the Company had $21.7 million and $21.6 million, outstanding
under its floor plan financing arrangements with John Deere and Associates
Commercial Corp., respectively.

PRODUCT WARRANTIES

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.

30
<PAGE> 31

John Deere provides retail purchasers of new equipment 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
equipment.

The Company generally sells its used trucks and equipment "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 on the truck or
equipment is transferable and has not yet expired. The customer does not receive
any warranty from the Company.

BACKLOG

At December 31, 1998, the Company's backlog of truck orders was
approximately $180 million, compared to $135.0 million at December 31, 1997. 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
1999. 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, 1998 are orders from a number of the
Company's major fleet customers.

GOVERNMENT REGULATION

The Heavy Duty Truck segment 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 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 and construction equipment 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

<PAGE> 32

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, GMC and John Deere 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 holds a registered
trademark 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
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, 1998, the Company employed approximately 1,306 people,
of which 155 were involved in the new truck department, 45 in the used truck
department, 33 in equipment sales 789 in parts, service and body shop services,
14 in insurance agency services, seven in financing services, 78 in truck
leasing and equipment rental operations, 69 in retail operations, and 116 in
administrative, management and corporate functions.

<PAGE> 33

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.

ITEM 2. PROPERTIES

The Company owns its truck center locations in Houston (4), San Antonio
(1), and Pharr, Texas, as well as 6,000 square feet of administrative office
space located in San Antonio, Texas, its Oklahoma City and Tulsa, Oklahoma
facilities, its Bossier City, Louisiana facility, its Fontana, California
facility, its equipment center in Houston, Texas, its retail center in Seguin,
Texas and a 5,700-acre ranch located in Cotulla, Texas. The remaining facilities
operate on leased premises, with the unexpired terms of the leases ranging from
six months to six years, inclusive of options to renew. The Company has an
option to terminate its leases on the Laredo, Texas locations, by providing
notice and paying rent in an amount ranging from three to six months. In all
cases the Company pays a fixed rent and is responsible for taxes, insurance,
repairs and maintenance. For 1998, the total net rent expense for the Company's
leased stores was approximately $1.4 million. The building square footage of the
Company's full-service truck centers range in size from 13,500 to 73,000 square
feet, 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, and are
situated on lots ranging from 0.4 to five acres. The Company's equipment centers
range in size form 3,000 to 44,000 square feet and are situated on lots ranging
from .5 to 45 acres.

ITEM 3. LEGAL PROCEEDINGS AND INSURANCE

From time to time, the Company is involved in certain litigation
arising out of its operations in the ordinary course of business. The Company
maintains liability insurance, including product liability coverage, in amounts
deemed adequate by management. To date, aggregate costs to the Company for
claims, including product liability actions, have not been material. However, an
uninsured or partially insured claim, or claim for which indemnification is not
available, could have a material adverse effect on the financial condition of
the Company. The Company believes that there are no claims or litigation
pending, the outcome of which could have a material adverse effect on the
financial position or results of operations of the Company, 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.

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

No matters were submitted to a vote of the Company's shareholder's
during the fourth quarter of the fiscal year ended December 31, 1998.

<PAGE> 34

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Company's common stock, $0.01 par value ("Common Stock"), is listed
for quotation on the Nasdaq National Market ("NASDAQ/NMS") under the symbol
"RUSH." From June 7, 1996, the date of the Company's initial public offering,
the following table sets forth the high and low closing sales prices for the
Common Stock for the fiscal periods indicated, as reported by the Nasdaq/NMS.
The quotations represent prices in the over-the-counter market between dealers
in securities, do not include retail markup, markdown or commissions and may not
necessarily represent actual transactions.

High Low
---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter ................ $ 11.50 $ 7.63
Second quarter ............... $ 13.75 $ 10.38
Third quarter ................ $ 12.63 $ 8.63
Fourth quarter ............... $ 12.00 $ 7.38

Fiscal 1997:
First Quarter ................ $ 12.38 $ 8.13
Second quarter ............... $ 9.00 $ 5.75
Third quarter ................ $ 9.63 $ 5.63
Fourth quarter ............... $ 9.75 $ 8.00
</TABLE>

As of March 26, 1999, there were approximately 68 record holders of the
common stock and approximately 1,271 beneficial holders of the common stock.

The Board of Directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors of the Company, and will depend on the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following Selected Consolidated Financial and Operating Data
relating to the Company has been taken or derived from the Consolidated
Financial Statements and other records of the Company. The consolidated
statements of income and consolidated balance sheets for each of the five years
in the period ended December 31, 1998, have been audited by Arthur Andersen LLP,
independent public accountants. The Financial and Operating Data presented below
may not be

<PAGE> 35

comparable between periods in all material respects or indicative of the
Company's future financial position or results of operations due primarily to
acquisitions which occurred during the periods presented, including the
acquisition of the Company's California, Oklahoma, and Colorado heavy-duty truck
operations in February 1994, in December 1995, and in March 1997, respectively,
and the Company's acquisitions of the Houston, Texas and Michigan John Deere
construction equipment centers in October 1997 and September 1998, respectively,
and the acquisition of the Rush retail center in March of 1998 . See Note 17 to
the Company's Consolidated Financial Statements for a discussion of such
acquisitions. The Selected Consolidated Financial and Operating Data should be
read in conjunction with the Company's Historical Consolidated Financial
Statements and related notes and other financial information included elsewhere
herein. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
STATEMENT DATA
Revenues
New and used truck sales ......... $ 143,569 $ 192,949 $ 258,613 $ 290,495 $ 422,754
Parts and service ................ 46.516 53,368 64,505 78,665 108,024
Construction Equipment
sales ............................ -- -- -- 7,518 35,402
Lease and rental ................. 5,476 10,058 13,426 14,761 18,594
Finance and insurance ............ 3,774 3,980 5,855 6,026 11,432
Other ............................ 1,936 1,279 1,262 1,904 16,579
--------- --------- --------- --------- ---------
Total revenues ................. 201,271 261,634 343,661 399,369 612,785
Cost of products sold .............. 168.254 219,059 289,143 334,583 508,242
--------- --------- --------- --------- ---------
Gross profit ....................... 33,017 42,575 54,518 64,786 104,543
Selling, general and
administrative
expenses ......................... 25,789 31,238 40,552 50,618 75,849
Depreciation and amortization
expense .......................... 1,615 1,846 2,416 2,977 4,813
--------- --------- --------- --------- ---------
Operating income ................... 5,613 9,491 11,550 11,191 23,881
Interest expense ................... 2,048 2,886 3,053 2,513 5,884
Minority interest .................. 123 162 -- -- --
Income from continuing
operations before income
taxes .............................. 3,442 6,443 8,497 8,678 17,997
Income tax expense ................. -- -- 2,295 3,298 7,200
--------- --------- --------- --------- ---------
Income from continuing
operations ......................... 3,442 6,443 6,202 5,380 10,797
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 $ 5,380 $ 10,797
========= ========= ========= ========= =========
</TABLE>

<PAGE> 36

YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------ ------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
PRO FORMA INCOME
STATEMENT DATA (Unaudited)
Income from continuing operations before taxes ................................... $6,443 $8,497
Pro forma adjustments to reflect federal and state income
taxes(1) ....................................................................... 2,448 3,229
------ ------
Pro forma income from continuing operations after provision for income taxes ..... $3,995 $5,268
====== ======
Pro forma basic and diluted income from continuing operations per share(2) ....... $ .93 $ .94
====== ======
Weighted average shares outstanding used in the pro forma basic and diluted income
from continuing operations per share calculation ............................... 4,297 5,590
====== ======
</TABLE>

YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Number of locations --
Full-service .............. 6 8 8 11 12
Parts/service ............. 5 6 6 6 6
-------- -------- -------- -------- --------
Total locations ......... 11 14 14 17 18
Unit truck sales --
New trucks ................ 1,705 2,263 2,871 3,040 4,315
Used trucks ............... 889 1,135 1,349 1,952 2,087
-------- -------- -------- -------- --------
Total unit trucks sales . 2,594 3,398 4,220 4,992 6,402
Construction equipment unit
sales --
New units ................. -- -- -- 90 227
Used units ................ -- -- -- 35 120
-------- -------- -------- -------- --------
Total construction
equipment unit sales ..... -- -- -- 125 347
Aggregate new and used truck
finance contracts sold (in
thousands) .................. $ 45,453 $ 53,165 $ 76,390 $ 91,445 $183,639
Truck lease and rental units 345 521 559 628 667
</TABLE>

<PAGE> 37

YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $(937) $626 $24,676 $18,364 $14,074
Inventories............. 20,755 36,517 36,688 66,757 107,140
Total assets............ 44,185 76,079 109,217 155,478 220,700
Floor plan financing.... 17,325 34,294 42,228 63,268 89,212
Line-of-credit
borrowings............ 860 10 20 20 10
Long-term debt, including
current portion....... 8,887 17,287 15,547 25,181 39,259
Shareholders' equity.... 4,376 7,685 36,692 42,072 52,869
</TABLE>

(1) For all periods presented prior to the Company's public offering on
June 7, 1996, the Company was an S corporation and was not generally
subject to corporate income taxes. The pro forma income tax provision
has been computed as if the Company were subject to corporate income
taxes for all periods presented based on the tax laws in effect during
the respective periods. See Note 15 to the Consolidated Financial
Statements.

(2) Pro forma basic and diluted income from continuing operations per share
was computed by dividing pro forma income from continuing operations by
the weighted average number of common shares outstanding, as adjusted
for the stock split of the Common Stock and giving pro forma effect for
the issuance of 547,400 shares of Common Stock, at an initial public
offering price of $12.00 per share, to repay the line-of-credit
borrowings made to fund the approximately $6.0 million distribution to
the Company's sole shareholder of the undistributed taxable S
corporation earnings. See Notes 3 and 4 to the Consolidated Financial
Statements.

<PAGE> 38

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

GENERAL

Certain statements contained in this Item 7, "Management's Discussion
of Financial Condition and Results of Operations" of the Form 10-K are
"forward-looking statements" within the meaning of the Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Exchange Act of 1934,
as amended. Specifically, all statements other than statements of historical
fact included in this Form 10-K regarding the Company's financial position,
business strategy and plans and objectives of management of the Company for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to 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 view of the Company with respect to future events and are subject to
certain 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 the
Company's Registration Statement on Form S-1 (File No. 333-3346) and in the
Company's annual, quarterly and other reports filed with the Securities and
Exchange Commission (collectively, "cautionary statements"). Although the
Company believes that its expectations are reasonable, it can give no assurance
that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected, or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The Company
does not intend to update these forward-looking statements.

Rush Enterprises consist of a Heavy Duty Truck segment and a
Construction Equipment Segment. The Heavy Duty Truck segment 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. The Construction
Equipment segment operates full-service John Deere dealerships whose operations
include the retail sale of new and used equipment, after-market parts and
service facilities, equipment rentals, and the financing of new and used
equipment. The Company also operates a retail division whose operations include
primarily the sale of farm and ranch supplies including fencing, horse and
cattle trailers, veterinarian supplies and the retail sale of western wear.

<PAGE> 39

In September 1997, the Company opened a new full-service Peterbilt
dealership in Pharr, Texas. This location is strategically positioned to take
advantage of increased heavy-duty truck traffic resulting from the North
American Free Trade Agreement.

In October 1997, the Company purchased certain assets and assumed
certain liabilities of C. Jim Stewart & Stevenson, Inc., which consisted of one
full-service John Deere dealership in Houston, Texas. The acquisition provides
the Company with an immediate presence in the construction equipment industry in
the state of Texas. The purchase price was approximately $30.2 million, funded
by (i) $4 million of cash, (ii) $21.1 million of borrowings under the Company's
floor plan financing arrangement with Associates Commercial Corp. and John Deere
Inc., (iii) $3,080,000 in real estate borrowings from Frost National Bank, and
(iv) a $2,062,500 promissory note payable to the seller.

In 1998, the Company opened a used truck sales lot in Austin, Texas.
This location is positioned to take advantage of the growing Austin truck market
and to take advantage of the increasing heavy-duty truck traffic on the I-35
corridor.

In August 1998, the Company opened its first combination heavy-duty
truck and construction equipment dealership in Beaumont, Texas. This
dealership's operations include new, used, parts, service, finance and insurance
sales for both heavy-duty trucks and construction equipment, as well as the
lease and rental of construction equipment. This location is positioned to take
advantage of synergies between heavy-duty truck and construction equipment
customers in the Houston gulf coast area.

<PAGE> 40

purchase price was approximately $13.1 million funded by (i) $2.5 million of
cash, (ii) $9.8 million of borrowings under the Company's floor plan financing
arrangements with Associates Commercial Corp. and John Deere Inc., and (iii)
$836,000 of borrowings from John Deere Credit Corp.

RESULTS OF OPERATIONS

The following discussion and analysis includes the Company's historical results
of operations for 1996, 1997, and 1998.

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

YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
New and used truck sales .......... 75.3% 72.7% 69.0%
Parts and service ................. 18.8 19.7 17.6
Construction Equipment Sales ...... -- 1.9 5.8
Lease and rental .................. 3.9 3.7 3.0
Finance and insurance ............. 1.7 1.5 1.9
Other ............................. 0.4 0.5 2.7
----- ----- -----
Total revenues .......... 100.0 100.0 100.0
Cost of products sold ............. 84.1 83.8 82.9
----- ----- -----
Gross profit ...................... 15.9 16.2 17.1
Selling, general and administrative
expenses ........................ 11.8 12.7 12.4
Depreciation and amortization ..... 0.7 0.7 0.8
----- ----- -----
Operating income .................. 3.4 2.8 3.9
Interest, net ..................... 0.9 0.6 0.8
----- ----- -----
Income from continuing operations . 2.5% 2.2% 2.9%
===== ===== =====
</TABLE>

FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1997.

Revenues.

Revenues increased by approximately $213.4 million, or 53.4%, from
$399.4 million to $612.8 million from 1997 to 1998. This increase was
attributable to gains achieved from each of the Company's revenue categories,
primarily as a result of improved operations, increased market demand, and
revenues generated from acquisitions and new store openings.

Sales of new and used trucks increased by approximately $132.3 million,
or 45.5%, from $290.5 million to $422.8 million from 1997 to 1998. Unit sales of
new and used trucks increased by 41.9% and 6.9%, respectively. The large
increase in new truck sales was mainly due to increasing fleet sales and an
overall strong new truck market in 1998. The moderate growth rate in used truck
sales is a result of a shortage of desirable used truck inventory during 1998
caused

<PAGE> 41

by fewer used truck trade-ins. The average selling price of new trucks
increased by 5.9% while used truck average selling prices increased by 13.8%.
New truck and used truck prices increased due to product mix and increased
market demand.

Parts and service sales increased by approximately $29.3 million, or
37.2%, from $78.7 million to $108.0 million from 1997 to 1998, with the
inclusion of a full year of operations in Colorado, Pharr and at the Rush
equipment center in Houston, Texas, and the 1998 additions of the Rush retail
center and the equipment center in Michigan accounting for approximately $14.4
million or 49.2% of the increase and the remainder being attributed to growth at
existing locations.

Sale of new and used construction equipment increased approximately
$27.9 million or 372%, from $7.5 million to $35.4 million from 1997 to 1998. The
increase is due the construction equipment segment only having 3 months of
operations in 1997 and the addition of the Michigan construction equipment
dealership in September of 1998. New and used equipment unit sales were 247 and
120 respectively for the year ended 1998.

Lease and rental revenues increased by approximately $3.8 million, or
25.7%, from $14.8 million to $18.6 million from 1997 to 1998, with the inclusion
of a full year of operations at the Rush equipment center in Houston, Texas and
the acquisition of the equipment center in Michigan accounting for approximately
$2.4 million or 63.2% of the increase, and the remainder being attributed to
growth at existing locations.

Finance and insurance revenues increased by approximately $5.4 million,
or 90%, from $6.0 million to $11.4 million from 1997 to 1998. The growth
resulted from increased truck sales coupled with lower borrowing costs during
1998 compared to 1997. Finance and insurance revenues have limited direct costs
and, therefore, contribute a disproportionate share of operating profits.

Other Income

Other income increased approximately $14.7 million or 773.7%, from $1.9
million to $16.6 million from 1997 to 1998, primarily due to the acquisition of
D & D Farm & Ranch Supermarket, Inc. in March of 1998 which accounted for $13.9
million or 94.6% of the increase.

Gross Profit

Gross profit increased by approximately $39.7 million, or 61.3%, from
$64.8 million to $104.5 million from 1997 to 1998. Approximately $17.4 million
or 43.8% of the increase is attributable to the operations of new truck,
equipment and retail locations previously described, either acquired in 1998 or
conducting their first full year of operations in 1998. The remaining gross
profit increase of $22.3 million or 56.2% is attributable to growth at existing
locations. Gross profit as a percentage of sales increased from 16.2% during
1997 to 17.1% during 1998. The increase in gross margins was due to a .22%
increase in gross margins on the sale of new and used trucks, a 1% increase in
gross margins on heavy-duty truck parts, service and body shop sales, and the
inclusion of a full year of construction equipment store operations which had a

<PAGE> 42

gross margin of 23.4% on approximately $51.3 million in revenue in 1998 compared
to a gross margin of 20.6% on approximately $10.2 million in sales in 1997.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by approximately
$25.2 million, or 49.8%, from $50.6 million to $75.8 million from 1997 to 1998.
The increase includes $12.9 million or 51.2%,attributable to the operations of
new truck, equipment and retail locations previously described, either acquired
in 1998 or conducting their first full year of operations in 1998. The remaining
increase resulted from an increase in salaries and sales commissions due to
increases in revenues and gross profit in 1998 compared to 1997. Selling general
and administrative expenses as a percent of revenue were 12.7% and 12.4% in 1997
and 1998, respectively.

Interest Expense, Net

Net interest expense increased by approximately $3.4 million, or
136.0%, from approximately $2.5 million to $5.9 million, from 1997 to 1998.
Interest expense increased primarily as a result of increased levels of
indebtedness due to higher floor plan liability levels and the refinancing of
certain real property owned by the Company during the fourth quarter of 1997.

Income from Continuing Operations Before Income Taxes

Income from continuing operations increased by $9.3 million, or 106.9%,
from $8.7 million to $18.0 million, from 1997 to 1998, as a result of the
factors described above.

Income Taxes

Income taxes increased by $3.9 million, or 118.2%, from $3.3 million to
$7.2 million, from 1997 to 1998. The Company has provided for taxes at the 40%
effective rate.

FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1996.

Revenues.

Revenues increased by approximately $55.8 million, or 16.2%, from
$343.6 million to $399.4 million from 1996 to 1997. This increase was
attributable to gains achieved from each of the Company's revenue categories,
with the largest increase resulting from the acquisition of the Company's
Colorado facilities in March 1997.

Sales of new and used trucks increased by approximately $31.9 million,
or 12.3%, from $258.6 million to $290.5 million from 1996 to 1997. Unit sales of
new and used trucks increased by 5.9% and 44.7%, respectively. The average
selling price of new trucks increased by .61% while used

<PAGE> 43

truck average selling prices increased by 1.76%. New truck and used truck prices
increased due to product mix and increased market demand.

Parts and service sales increased by approximately $14.2 million, or
22.0%, from $64.5 million to $78.7 million from 1996 to 1997, with the inclusion
of the Colorado, Pharr and John Deere operations accounting for approximately
73% of the increase and the remainder being attributed to growth at existing
locations.

Lease and rental revenues increased by approximately $1.4 million, or
10.4%, from $13.4 million to $14.8 million from 1996 to 1997, primarily as a
result of an increase of 12.3% in the size of the rental fleet in 1997 compared
to 1996, and the addition of leasing facilities at the San Antonio and Pharr
locations in December 1997.

Finance and insurance revenues increased by approximately $171,000, or
2.9%, from $5.8 million to $6.0 million from 1996 to 1997. The lack of
substantial growth resulted from increased competition coupled with higher
borrowing costs during the first half of 1997. Finance and insurance revenues
have limited direct costs and, therefore, contribute a disproportionate share of
operating profits.

Gross Profit

Gross profit increased by approximately $10.3 million, or 18.8%, from
$54.5 million to $64.8 million from 1996 to 1997, primarily due to the increase
in revenues from the acquisition of the Colorado and John Deere operations, and
opening of the Pharr location. Gross profit as a percentage of sales increased
slightly from 15.9% during 1996 to 16.2% during 1997. The increase in gross
margins was due to a .29% increase in gross profit on the sale of new and used
trucks, the inclusion of the construction equipment store which had a gross
margin of 20.6% on approximately $10.2 million in sales, which was offset by a
.27% decrease in gross margins on parts and service sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by approximately
$10.0 million, or 24.6%, from $40.6 million to $50.6 million from 1996 to 1997.
The increase includes $5.8 million attributable to the addition of the Colorado
and Pharr truck stores and the John Deere construction equipment center. The
remaining increase resulted from an increase in truck sales commissions,
increases in salaries, and infrastructure costs associated with the opening of
the Pharr facility. Selling general and administrative expenses as a percent of
revenue were 11.8% and 12.7% in 1996 and 1997, respectively.

Interest Expense, Net

Net interest expense decreased by approximately $540,000, or 17.4%,
from approximately $3.1 million to $2.5 million, from 1996 to 1997. Interest
expense decreased primarily as a result of decreased levels of indebtedness due
to the Company's initial public offering on June 7, 1996.

<PAGE> 44

Income from Continuing Operations Before Income Taxes

Income from continuing operations increased by $181,000, or 2.1%, from
$8.5 million to $8.7 million, from 1996 to 1997, as a result of the factors
described above.

Income Taxes

Income taxes increased by $1 million, or 43.5%, from $2.3 million to
$3.3 million, from 1996 to 1997. The increase is a result of the Company's
initial public offering and termination of its subchapter S tax status during
June of 1996, thus only incurring federal income tax expense for approximately
half of 1996. The company's effective tax rate for 1996 and 1997 was 38%.

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 the largest increase 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%. Unit sales increases were due to the factors
described above. 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 most 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, primarily as a
result of 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.

44
<PAGE> 45

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.

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 the increase in revenues described above. 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 Before Income Taxes

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.

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

<PAGE> 46

cash needs have historically been financed with retention of profits and
borrowings under credit facilities available to the Company.

At December 31, 1998, the Company had working capital of approximately
$14.1 million, including $22.5 million in cash, $19.5 million in accounts
receivable, $107.1 million in inventories, and $607,000 in prepaid expenses
offset by $89.2 million outstanding under floor plan financing, $7.1 million in
current maturities of long-term debt, $6.9 million of accounts payable, $21.7
million in accrued expenses, and $10.7 million in a note payable to shareholder.
The aggregate maximum borrowing limits under working capital lines of credit
with its primary truck lender are approximately $8.0 million. The Company's
floor plan agreements with its primary truck lender limit the aggregate amount
of borrowings based on the number of new and used trucks. As of December 31,
1998, the Company's floor plan arrangements permit the financing of up to 1,133
new trucks and 432 used trucks, respectively, and the availability for new and
used trucks is 679 and 105, respectively. The Company's floor plan agreement
with its primary construction equipment lender is based on the book value of the
Company's construction equipment inventory. As of December 31, 1998, the
aggregate amount of borrowing capacity was $25 million, with approximately $21.6
million outstanding. Additional amounts are available under the Company's John
Deere dealership agreement. At December 31, 1998, approximately $21.7 million
was outstanding pursuant to the John Deere dealership agreement.

For 1998, operating activities resulted in net cash provided by
activities of approximately $0.6 million. Net income of $10.8 million, a
decrease in accounts receivable of $2.1 million, increases in depreciation and
amortization, deferred income tax expense, trade accounts payable and accrued
expenses of $4.8 million, $0.5 million, $1.0 million and $6.8 million
respectively, more than offset increases in inventory and other assets of $25.0
million and $0.2 million respectively, and the gain on sale of property and
equipment of $0.2 million.

During 1998, the Company used $31.2 million of net cash in investing
activities, including expenditures of $8.6 million related to the acquisitions
of the Rush retail center and the Michigan John Deere locations, and $22.9
million that was related to the expansion of various facilities, and the
purchase of units placed in the Company's truck leasing fleet. These expenditure
have resulted in a net increase of $23.2 in property and equipment from 1997 to
1998.

Net cash provided by financing activities in 1998 amounted to $33.2
million. Cash flows from financing activities included proceeds of $22.6 million
from notes payable due to the financing of expansion projects and the purchase
of units placed in the Company's truck leasing fleet, a net increase of $16.5
million in floor plan financings due mainly to the addition of the Michigan John
Deere locations, and principal payments on notes payable of $5.9 million.

For 1997, operating activities resulted in net cash provided by
operations of approximately $9.3 million. Net income of $5.4 million, decreases
in accounts receivable and other assets of $2.2 million and $1.1 million
respectively, and increases in depreciation and amortization, accounts payable,
accrued expenses, and the provision for deferred income taxes, of $3.0 million,
$594,000 $3.9 million and, $153,000 more than offset an increase in inventory of
$6.7 million and the gain on sale of property and equipment of $305,000.

<PAGE> 47

During 1997, the Company used $46.1 million of net cash in investing
activities, including expenditures of $36.1 million related to the acquisition
of the Colorado Peterbilt locations and the Texas John Deere dealership and
$10.2 million that was principally related to the expansion of its various
facilities, including the construction of the Pharr store.

Net cash provided by financing activities in 1997 amounted to $35.1
million. Cash flows from financing activities included proceeds of $21.0 million
from notes payable primarily due to the refinancing of real estate, a net
increase of $21.0 million in floor plan financings due to the addition of the
Texas John Deere dealership and principal payments on notes payable of $6.9
million.

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.

During 1998, the Company arranged customer financing for approximately
43.4% of its total new and used truck sales, and derived approximately 64% and
36% of its finance revenues from the sale of new and used trucks, respectively.
The Company's new and used truck financing is typically provided through
Associates and PACCAR Financial. The Company financed approximately $183.6
million of new and used truck purchases in 1998. 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
repossession losses resulting from defaults under the installment contracts sold
to Associates and PACCAR Financial to $400,000 and $200,000 per year,
respectively.

<PAGE> 48

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, 1998,
the Company had approximately $45.9 million outstanding under its floor plan
financing arrangement with GMAC. GMAC permits the Company to earn, for up to
62.5% of the amount borrowed under its floor plan financing arrangement with
GMAC, interest at the prime rate, less one-half of a percent, on overnight funds
deposited by the Company with GMAC.

Substantially all of the Company's new equipment purchases are financed
by John Deere and Associates Commercial Corp. The Company finances all , or
substantially all, of the purchase price of its new equipment inventory, under
its floor plan facilities. The agreement with John Deere provides interest free
financing for five months after which time the amount financed is required to be
paid in full, or an immediate 3% discount with payment due in 30 days. When the
equipment is sold prior to the expiration of the five month period, the Company
is required to repay the principal within approximately 15 days of the sale.
Should the equipment financed by John Deere not be sold within the five month
period, it is transferred to the Associates Commercial Corp. floor plan
arrangement. The Company makes principal payments to Associates Commercial
Corp., for sold inventory, on the 15th day of each month . Used and rental
equipment, to a maximum of book value, is financed under a floor plan
arrangement with Associates Commercial Corp. The Company makes monthly interest
payments on the amount financed and is required to commence loan principal
repayments on rental equipment as book value reduces. Principal payments, for
sold inventory, on used equipment are made the 15th day of each month following
the sale. The loans are collateralized by a lien on the equipment. The Company's
floor plan agreements limit the aggregate amount of borrowings based on the book
value of new and used equipment units. As of December 31, 1998, the Company's
floor plan arrangement with Associates Commercial Corp. permits the financing of
up to $25 million in construction equipment. At December 31, 1998, the Company
had $21.7 million and $21.6 million, outstanding under its floor plan financing
arrangements with John Deere and Associates Commercial Corp., respectively.

Seasonality

The Company's heavy-duty truck 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 third and fourth 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.

<PAGE> 49

Seasonal effects in the construction equipment business are primarily
driven by the weather. Seasonal effects on construction equipment sales related
to the seasonal purchasing patterns of any single customer type are mitigated by
the Company's diverse customer base that includes contractors, for both
residential and commercial construction, utility companies, federal, state and
local government agencies, and various petrochemical, industrial and material
supply type businesses that require construction equipment in their daily
operations.

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. Industry-wide domestic retail sales of heavy-duty
trucks exceeded 200,000 units for only the second time, according to R.L. Polk,
the industry recorded approximately 213,000 new truck registrations in 1998. The
industry forecasts an increase of approximately 3% in heavy-duty new truck sales
in 1999. 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.

Year 2000

The Year 2000 disclosure below constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.

The year 2000 problem refers to the limitations of the programming code
in certain existing software programs to recognize date sensitive information
for the year 2000 and beyond. Unless modified prior to the year 2000, such
systems may not properly recognize such information and could generate erroneous
data or cause a system to fail to operate properly. The efficient operation of
the Company's business is dependent on the proper functioning of its computer
software programs, network and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including inventory management, information management
services and financial reporting, as well as in various administrative
functions.

The Company engaged an outside consultant to assist it in performing an
inventory of its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with suppliers,
customers and vendors, and services supplied by vendors to coordinate year 2000
compliance and conversion. This inventory was completed

<PAGE> 50

during the first quarter of 1999 and evaluated the Programs and Systems, the
Company's other devices which have imbedded computer processors or microchips
and telecommunication, HVAC and security systems. Based on the Company's
Programs and Systems inventory and information supplied by the Company's vendors
and suppliers, the Company expects to attain year 2000 compliance in a timely
fashion and in advance of the year 2000 date change.

The primary operating systems of the Company are Karmak and PFW. The
Company believes, based upon representations made by the vendor of PFW, that PFW
is currently year 2000 compliant. The vendor of Karmak has informed the Company
that it expects to be year 2000 compliant by March 31, 1999. The Company does
not utilize any customized hardware, programs or applications and is relying on
its vendors to ensure that its Programs and Systems are year 2000 compliant.

The Company believes that the year 2000 problem will not pose a
significant operational problem for the Company. However, because most computer
systems are, by their very nature, interdependent, it is possible that
non-compliant third party computers may not interface properly with the
Company's computer systems. The Company could be adversely affected by the year
2000 problem if it or unrelated parties fail to successfully address this issue.

Management of the Company currently anticipates that the expenses and
capital expenditures associated with its year 2000 compliance project, including
costs associated with modifying the Programs and Systems as well as the cost of
purchasing or leasing, if required, replacement hardware and software, will not
have a material effect on its business, financial position or results of
operations and are expenses and capital expenditures the Company anticipated
incurring in the ordinary course of business regardless of the year 2000
problem. Purchased hardware and software has been and will continue to be
capitalized in accordance with normal accounting policy. Personnel and other
costs related to this process are being expensed as incurred.

The costs of year 2000 compliance and the expected completion dates are
the best estimates of Company management and are believed to be reasonably
accurate. In the event the Company's plan to address the year 2000 problem is
not successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.

In the event the Company determines following the year 2000 date change
that its Programs and Systems are not year 2000 compliant, the Company will
likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence to either the
Company's network or its primary operating systems, Karmak and PFW, the
Company's contingency plans call for it to obtain, either from its current or
other vendors, as soon as is feasible, hardware and/or software that is 2000
compliant. Until such hardware and/or software can be obtained, the Company will
plan to use non-computer systems and manual processes for its

<PAGE> 51

business, including information management services and financial reporting, as
well as its various administrative functions. Non-critical hardware or software
will be replaced, consistent with the Company's current policy, on an as-needed
basis.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk o loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, and other
relevant market rate or price risks.

The Company is exposed to some market risk through interest rates,
related to its floor plan borrowing arrangements and discount rates related to
finance sales. Floor plan borrowings are based on the Prime Rate of interest and
are used to meet working capital needs. As of December 31, 1998, the Company had
floor plan borrowings of approximately $89,212,000. Assuming an increase in the
Prime Rate of interest of 50 basis points, future cash flows would be effected
by $446,000. The interest rate variability on all other debt would not have a
material adverse effect on the Company's financial statements. The Company's
provides all customer financing opportunities to various finance providers. The
Company receives all finance charges, in excess of a negotiated discount rate,
from the finance providers within 30 days. The negotiated discount rate is
variable, thus subject to interest rate fluctuations. This interest rate risk is
mitigated by the Company's ability to pass discount rate increases to customers
through higher financing rates.

<PAGE> 52

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>

<S> <C>
Report of Independent Public Accountants. 53

Consolidated Balance Sheets as of December 31, 1997 and 1998. 54

Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998. 55

Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1997 and 1998. 57

Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998. 58

Notes to Consolidated Financial Statements. 59
</TABLE>

52
<PAGE> 53

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Rush Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of Rush
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Antonio, Texas
February 19, 1999

53
<PAGE> 54

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1998

(In Thousands, Except Shares and Per Share Amounts)

1997 1998
-------- --------
ASSETS

<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,816 $ 22,516
Accounts receivable, net 20,894 19,478
Inventories 66,757 107,140
Prepaid expenses and other 381 607
-------- --------

Total current assets 107,848 149,741

PROPERTY AND EQUIPMENT, net 34,158 54,448

OTHER ASSETS, net 13,472 16,511
-------- --------

Total assets $155,478 $220,700
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Floor plan notes payable $ 63,268 $ 89,212
Current maturities of long-term debt 2,439 7,095
Advances outstanding under lines of credit 20 10
Trade accounts payable 5,751 6,926
Accrued expenses 12,556 20,086
Note payable to shareholder 5,450 10,700
-------- --------

Total current liabilities 89,484 134,029
-------- --------

LONG-TERM DEBT, net of current maturities 22,742 32,164

DEFERRED INCOME TAXES, net 1,180 1,638

COMMITMENTS AND CONTINGENCIES (Note 16)

SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares
outstanding in 1997 and 1998 -- --
Common stock, par value $.01 per share; 25,000,000 shares authorized; 6,643,730
shares outstanding in 1997 and 1998 (Note 3) 66 66
Additional paid-in capital 33,342 33,342
Retained earnings 8,664 19,461
-------- --------

Total shareholders' equity 42,072 52,869
-------- --------

Total liabilities and shareholders' equity $155,478 $220,700
======== ========
</TABLE>

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

54
<PAGE> 55

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(In Thousands, Except Per Share Amounts)

1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
New and used truck sales $ 258,613 $ 290,495 $ 422,754
Parts and service 64,505 78,665 108,024
Construction equipment sales -- 7,518 35,402
Lease and rental 13,426 14,761 18,594
Finance and insurance 5,855 6,026 11,432
Other 1,262 1,904 16,579
--------- --------- ---------

Total revenues 343,661 399,369 612,785

COST OF PRODUCTS SOLD 289,143 334,583 508,242
--------- --------- ---------

GROSS PROFIT 54,518 64,786 104,543

SELLING, GENERAL AND ADMINISTRATIVE 40,552 50,618 75,849

DEPRECIATION AND AMORTIZATION 2,416 2,977 4,813
--------- --------- ---------

OPERATING INCOME 11,550 11,191 23,881
--------- --------- ---------

INTEREST INCOME (EXPENSE):
Interest income 1,118 1,155 982
Interest expense (4,171) (3,668) (6,866)
--------- --------- ---------

Total interest expense, net (3,053) (2,513) (5,884)
--------- --------- ---------

INCOME BEFORE INCOME TAXES 8,497 8,678 17,997
--------- --------- ---------

PROVISION FOR INCOME TAXES 2,295 3,298 7,200
--------- --------- ---------

NET INCOME $ 6,202 $ 5,380 $ 10,797
========= ========= =========
</TABLE>

55
<PAGE> 56

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (continued)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(In Thousands, Except Per Share Amounts)

1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE (Note 14):
Net income per common share $ 1.11 $ .81 $ 1.62
========== ========== ==========

UNAUDITED PRO FORMA DATA (Note 4):
Income before income taxes $ 8,497
Pro forma adjustments to reflect federal and state income taxes 3,229
----------

Pro forma income after provision for income taxes
$ 5,268
==========
Pro forma basic and diluted income per share $ .94
----------

Weighted average shares outstanding used in the pro forma basic and
diluted income per share calculation 5,590
==========

</TABLE>

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

56
<PAGE> 57

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(In Thousands)

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

<S> <C> <C> <C> <C>
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

NET INCOME -- -- -- 5,380
---------- ---------- ---------- ----------

BALANCE, December 31, 1997 6,644 66 33,342 8,664

NET INCOME -- -- -- 10,797
---------- ---------- ---------- ----------

BALANCE, December 31, 1998 6,644 $ 66 $ 33,342 $ 19,461
========== ========== ========== ==========
</TABLE>

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

57
<PAGE> 58

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(In Thousands)

1996 1997 1998
---------- ---------- -------

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,202 $ 5,380 $ 10,797
Adjustments to reconcile net income to net cash provided by operating
activities- net of acquisitions
Depreciation and amortization 2,416 2,977 4,813
Gain on sale of property and equipment - (305) (195)
Provision for deferred income tax expense 1,027 153 458
Change in accounts receivable, net (6,653) 2,170 2,141
Change in inventories (171) (6,658) (25,006)
Change in prepaid expenses and other, net (1,237) 1,122 (174)
Change in trade accounts payable (2,434) 594 1,007
Change in accrued expenses 959 3,872 6,786
---------- ---------- ----------

Net cash provided by operating activities 109 9,305 627
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (8,491) (10,194) (22,907)
Proceeds from the sale of property and equipment 682 581 638
Business acquisitions - (36,068) (8,625)
Change in other assets (326) (457) (283)
---------- ---------- ----------

Net cash used in investing activities (8,135) (46,138) (31,177)
---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 31,364 - -
Proceeds from long-term debt 3,150 21,053 22,624
Principal payments on long-term debt (4,900) (6,951) (5,892)
Draws (payments) on floor plan notes payable, net 7,934 21,040 16,518
Draws on lines of credit, net 10 - -
Dividends paid (10,174) - -
---------- ---------- ----------

Net cash provided by financing activities 27,384 35,142 33,250
---------- ---------- ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,358 (1,691) 2,700

CASH AND CASH EQUIVALENTS, beginning of year 2,149 21,507 19,816
---------- ---------- ----------

CASH AND CASH EQUIVALENTS, end of year $ 21,507 $ 19,816 $ 22,516
========= ========= =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 4,254 $ 3,378 $ 6,574
========= ========= =========
Income taxes $ 1,332 $ 1,572 $ 4,478
========= ========= =========
</TABLE>

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

58
<PAGE> 59

RUSH ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, now operates a Heavy
Duty Truck segment and a Construction Equipment segment. The Heavy Duty Truck
segment operates a regional network of 18 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, Colorado, Oklahoma and Louisiana. The
Construction Equipment segment, formed during 1997, operates a network of six
John Deere equipment centers in Texas and Michigan. Dealership operations
include the retail sale of new and used equipment, after-market parts and
service facilities, equipment rentals, and the financing of new and used
equipment (see note 19).

In March 1997, the Company purchased substantially all the assets of Denver
Peterbilt, Inc. which consisted of two full-service dealerships in Denver and
Greeley, Colorado. Denver Peterbilt, Inc.'s primary line of business is the sale
of new Peterbilt and used heavy-duty trucks, parts, leasing and service (see
note 17).

In October 1997, the Company developed a new construction equipment division,
Rush Equipment Centers, and purchased substantially all the assets of the
Houston, Texas John Deere Construction Equipment Dealership from C. Jim Stewart
& Stevenson, Inc. Rush Equipment Centers' primary line of business is the sale
and rental of new John Deere and used construction equipment, parts and service
(see note 17).

In March 1998, the Company developed a new retail division, Rush Retail Centers,
and acquired all of the issued and outstanding capital stock of D & D Farm and
Ranch Supermarket Inc. Rush Retail Centers' primary line of business is the
retail sale of farm and ranch supplies including, fencing, horse and cattle
trailers, veterinarian supplies and western wear (see note 17).

In September 1998, the Company acquired all of the assets and assumed certain
liabilities of Klooster Equipment, Inc. and began operations of Rush Equipment
Centers Michigan. Klooster Equipment Inc.'s primary line of business is the sale
and rental of new John Deere and used construction equipment, parts and service.

As part of the corporate reorganization on June 12, 1996 (see note 3),
Associated Acceptance, Inc. (AA), came under the control of the Company and,
thus, 100 percent of the financial position and results of operations of AA has
been included in the Company's consolidated financial statements as of December
31, 1997 and 1998.

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

59
<PAGE> 60

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 and construction equipment
inventory and by utilizing the first-in, first-out methods for tires, parts and
accessories.

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
--------------------
1997 1998 Life (Years)
-------- -------- ------------

<S> <C> <C> <C>
Land $ 6,731 $ 9,972 --
Buildings and improvements 13,647 18,285 31 - 39
Leasehold improvements 3,467 4,303 7 - 10
Machinery and shop equipment 4,531 6,478 5 - 7
Furniture and fixtures 5,159 8,043 5 - 7
Transportation equipment 4,563 8,806 2 - 5
Leased vehicles 3,594 9,188 3 - 7
Accumulated depreciation and amortization (7,534) (10,627)
-------- --------

$ 34,158 $ 54,448
======== ========
</TABLE>

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 goodwill related to acquisitions, of
approximately $12.7 million and $15.1 million, as of December 31, 1997 and 1998,
respectively , and long-term deposits. The goodwill is being amortized on a
straight-line basis over an estimated useful life of 30 years. Accumulated
amortization of other assets, at December 31, 1997 and 1998, was approximately
$0.5 million and $1.1 million, respectively. Periodically, the Company assesses
the appropriateness of the asset valuations of goodwill and the related
amortization period.

60
<PAGE> 61

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.

Revenue Recognition Policies

Income on the sale of vehicles and construction equipment (collectively,
"unit")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 unit 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 1996, 1997 and 1998, 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 unit. 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. Lease and rental income is recognized over the period of
the related lease or rental 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 unit. Retail revenue is earned at the time the Company sells the
merchandise to its customer.

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,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Liabilities incurred in connection with property and
equipment acquisitions $ 2,901 $ -- $ --
Liabilities incurred in connection with acquisitions of
dealerships and leasing operations -- 2,063 1,750
Assignment of debt in connection with the disposal of
property and equipment -- 1,061 --

</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Post retirement Benefits" (SFAS 132). SFAS 132
standardizes the disclosure requirements for pensions and other post retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer useful. This statement is effective for
fiscal years beginning after December 15, 1997. The Company does not provide
post retirement or post employment benefits to its employees.

In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" (SOP
98-5). SOP 98-5 requires all start-up activities, as defined, to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Earlier

61
<PAGE> 62

application is encouraged, initial application will be reported as a cumulative
effect of a change in accounting principle and restatement of previously issued
financial statements is not permitted. SOP 98-5 will not have a material impact
on the financial statements 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, 1997 and 1998, was 6,643,730.

Dividends declared, paid or payable for the years ended December 31, 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. PRO FORMA INFORMATION (UNAUDITED):

Pro Forma Income and Pro Forma Income Per Share (Unaudited)

Pro forma income and pro forma income 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, 1996.

62
<PAGE> 63

5. 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
----------- ----------------
<S> <C>
PACCAR March 2000 to
October 2000
GMC October 2000
Volvo March 2000
John Deere Indefinite
</TABLE>

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, 1998, the
Company's management believes it was in compliance with all the restrictions of
its dealership agreements.

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 98 percent and 97 percent
of the Company's new vehicle sales for the years ended December 31, 1997 and
1998, respectively.

The Company purchases most of its new construction equipment and parts from John
Deere, at prevailing prices charged to all franchised dealers. Sales of new John
Deere equipment accounted for 88 percent of the Company's new equipment sales
for the year ended December 31, 1998.

Primary Lenders

The Company purchases its new and used truck and construction equipment
inventories with the assistance of floor plan financing programs offered by
various financial institutions and John Deere. The financial institution used
for truck inventory purchases also provides the Company with a line of credit
which allows borrowings of up to $8,000,000 and other variable interest rate
notes. The loan agreement with the financial institution, used for truck
inventory purchases, provides that such agreement may be terminated at the
option of the lender with notice of 120 days.

The loan agreement with the financial institution used primarily for
construction equipment purchases expires in September 1999. Additionally,
financing is provided by John Deere pursuant to the Company's equipment
dealership agreement. Furthermore, the agreements also provide that the
occurrence of certain events will be considered events of default. In the event
that the Company's financing becomes insufficient, or its relationship
terminates with the current primary lenders, 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
8.)

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.

63
<PAGE> 64

The Company places its cash and cash equivalents with what it considers to be
quality financial institutions. At December 31, 1998, the Company had deposits
in excess of federal insurance totaling approximately $7,011,000.

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 and construction equipment markets 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 both with and without
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.

6. ACCOUNTS RECEIVABLE:

The Company's accounts receivable, net, consisted of the following (in
thousands):

December 31,
1997 1998
-------- --------

<S> <C> <C>
Trade accounts receivable from sale of vehicles and
construction equipment $ 16,042 $ 13,719
Other trade receivables 2,605 3,066
Warranty claims 1,486 1,647
Other accounts receivable 1,361 1,646
Less- Allowance for doubtful receivables and repossession
losses (600) (600)
-------- --------

Total $ 20,894 $ 19,478
======== ========
</TABLE>

For the years ended December 31, 1996, 1997 and 1998, the Company had sales to
one of its related parties of approximately $939,000, $0, and $0, respectively.

7. INVENTORIES:

The Company's inventories consisted of the following (in thousands):

December 31,
1997 1998
---------- ----------

<S> <C> <C>
New vehicles $ 15,722 $ 24,550
Used vehicles 8,884 12,231
Construction equipment - new 11,457 30,780
Construction equipment - used 659 4,000
Construction equipment - rental 12,970 10,000
Parts and accessories 17,065 20,982
Other -- 4,597
---------- ----------

Total $ 66,757 $ 107,140
========== ==========
</TABLE>

64
<PAGE> 65

8. 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 and construction equipment. 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
less a percentage rate as determined by the finance provider, as defined in the
agreements. The interest rates applicable to these agreements were 7.25 to 7.5
percent as of December 31, 1998. The amounts borrowed under these agreements are
due when the related truck or construction equipment inventory (collateral) is
sold and the sales proceeds are collected by the Company, or in the case of
construction equipment rentals, when the carrying value of the equipment is
reduced. These lines may be modified, suspended, or terminated by the lender as
described in note 5.

The Company's floor plan agreement with its primary truck lender limits the
borrowing capacity based on the number of new and used trucks that may be
financed. As of December 31, 1998, the aggregate amounts of unit capacity for
new and used trucks are 1,133 and 432, respectively, and the availability for
new and used trucks is 679 and 105, respectively.

The Company's floor plan agreement with its primary construction equipment
lender is based on the book value of the Company's construction equipment
inventory. As of December 31, 1998, the aggregate amount of borrowing capacity
with the Company's primary lender, was $25 million, with approximately $21.6
million outstanding. Additional amounts are available under the Company's John
Deere dealership agreement. At December 31, 1998, approximately $21.7 million
was outstanding pursuant to the John Deere dealership agreement.

Amounts of collateral as of December 31, 1998, are as follows (in thousands):

<TABLE>

<S> <C>
Inventories, new and used vehicles and construction
equipment at cost based on specific identification $ 81,561
Truck and construction equipment sale related accounts
receivable 13,719
----------
Total $ 95,280
==========

Floor plan notes payable $ 89,212
----------
</TABLE>

Lines of Credit

The Company has a separate line-of-credit agreement with a financial institution
which provides for an aggregate maximum borrowing of $8,000,000, with advances
generally limited to 75 percent of new parts inventory. 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. The
Company was in compliance with these covenants at December 31, 1998. Either
party may terminate the agreement with 30 days written notice. As of December
31, 1997 and 1998, advances outstanding under the various line-of-credit
agreements amounted to $20,000 and $10,000, respectively. As of December 31,
1998, $7,990,000 was available for future borrowings. This line is discretionary
and may be modified, suspended or terminated at the election of the lender.

Note payable to shareholder is a short-term note that is payable on demand and
bears interest equal to one percent per annum less than the rate of interest
received by the Company under its agreement to deposit overnight funds in
interest bearing accounts with one of the Company's floor plan lenders.

65
<PAGE> 66

9. LONG-TERM DEBT:

Long-term debt is comprised of the following (in thousands):

December 31,
1997 1998
---------- ----------

<S> <C> <C>
Variable interest rate term notes $ 1,679 $ 1,572
Fixed interest rate term notes 23,502 37,687
---------- ----------

Total debt 25,181 39,259

Less- Current maturities (2,439) (7,095)
---------- ----------

$ 22,742 $ 32,164
========== ==========
</TABLE>

As of December 31, 1998, debt maturities are as follows (in thousands):
<TABLE>

<S> <C>
1999 $ 7,095
2000 6,117
2001 4,676
2002 8,042
2003 4,747
Thereafter 8,582
--------
$ 39,259
========
</TABLE>

The Company's variable interest rate notes are with one of the Company's primary
lenders and have an interest rate of prime, which was 7.75 percent at December
31, 1998. Monthly payments of these notes range from $2,708 to $7,917, plus
interest. These notes mature in February 2011.

The Company's fixed interest rate notes are primarily with financial
institutions and have interest rates ranging from 6.15 percent to 8.5 percent at
December 31, 1998. Payments on the notes range from $430 per month to $51,333
per quarter, plus interest. Maturities of these notes range from January 1999 to
January 2014.

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.

10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

In December 1991, Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments," (SFAS 107) 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.

66
<PAGE> 67

11. 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. 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 for those employees with less than five years of
service and contributed an amount equal to 50 percent of the employees'
contributions for those employees with more than 5 years of service. During the
years ended December 31, 1996, 1997 and 1998, the Company incurred expenses of
approximately $166,000, $215,000 and $648,000, respectively, related to the Rush
Plan.

Through March 1998, South Coast Peterbilt also had a defined contribution
pension plan (the South Coast Plan) which was available to all employees of
South Coast Peterbilt. Effective April 1, 1998 the South Coast Plan was
terminated at which time all eligible South Coast employees were permitted to
enter the Rush Plan. During the years ended December 31, 1996, 1997 and 1998,
South Coast incurred expenses of approximately $185,000, $151,000 and $46,000,
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.

12. 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, 1996, 1997 and 1998, were
approximately $4,354,000, $4,915,000 and $5,648,000, respectively.

Minimum rental commitments for noncancelable vehicle leases in effect at
December 31, 1998, are as follows (in thousands):

<TABLE>

<S> <C>
1999 $ 5,040
2000 4,081
2001 3,090
2002 2,699
2003 2,108
Thereafter 2,493
--------

Total $ 19,511
========
</TABLE>

67
<PAGE> 68

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, 1996, 1997 and 1998, consisted of minimum
payments of approximately $7,443,000, $7,978,000 and $7,867,000, respectively,
and contingent rentals of approximately $2,018,000, $1,940,000 and $1,862,000
respectively. Minimum lease payments to be received for noncancelable leases and
subleases in effect at December 31, 1998, are as follows (in thousands):

<TABLE>

<S> <C>
1999 $ 7,474
2000 6,121
2001 4,674
2002 3,810
2003 2,937
Thereafter 2,800
--------

Total $ 27,816
========
</TABLE>

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 December 31,
1996, 1997 and 1998 was $937,000, $1,194,000 and $1,423,000, respectively.
Future minimum lease payments under noncancelable leases at December 31, 1998,
are as follows (in thousands):

<TABLE>

<S> <C>
1999 $ 1,195
2000 1,075
2001 826
2002 761
2003 696
Thereafter 2,495
-------

Total $ 7,048
=======
</TABLE>

13. 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). Because the Company has
elected to continue to follow APB 25, SFAS 123 requires disclosure of pro forma
net income and earnings per share as if the new fair value accounting method was
adopted. The Company has presented the pro forma information required by SFAS
123.

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.

68
<PAGE> 69

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 650,000 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 equal to $14.40 per share.

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.

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.

In March 1998 and 1997, the Company granted options under the Incentive Plan to
purchase an aggregate of 168,140 and 103,013 shares, respectively, of common
stock to employees. Each option granted shall become exercisable in three annual
installments beginning on the third anniversary of the date of grant. The
options are exercisable at a price equal to the fair value of the Company's
common stock at the date of grant.

During 1997, the Board of Directors and shareholders adopted the Rush
Enterprises, Inc. 1997 Non-Employee Director Stock Option Plan (the Director
Plan). The Director Plan is designed to attract and retain highly qualified
non-employee directors, reserving 100,000 shares of common stock for issuance
upon exercise of any awards granted under the Plan. Under the terms of this
plan, each non-employee director received options to purchase 10,000 shares as
of the date of adoption or on their respective date of election, all of which
are fully vested and are exercisable immediately, and expire ten years from the
date of grant. During each of the years ended December 31, 1998 and 1997, 30,000
options were granted and exercisable at a price equal to the fair values of the
Company's common stock at the dates of grant. None of these options have been
exercised as of December 31, 1998.

A summary of the Company's stock option activity, and related information for
the years ended December 31, 1996, 1997 and 1998 follows:

1996 1997 1998
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------

<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year -- $ -- -- $ -- 133,013 $ 8.52
Granted 19,403 10.80 133,013 8.52 198,140 11.15
Exercised 18,730 10.80 -- -- -- --
Forfeited 673 10.80 -- -- -- --
--------- --------- --------- --------- --------- ---------
Outstanding - end of year -- -- 133,013 -- 331,153 --
--------- --------- --------- --------- --------- ---------
Exercisable at end of year -- $ -- 30,000 $ 8.13 60,000 $ 10.06

Weighted average fair value of
options granted during the year $ -- $ 3.67 $ 5.84
</TABLE>

69
<PAGE> 70

The following table summarizes the information about the Company's options
outstanding at December 31, 1998:

Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$7.13 - 12.00 331,153 8.83 $10.09 60,000 $10.06

</TABLE>

70
<PAGE> 71

If the Company had adopted the fair value accounting method under SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income:
As Reported $ 6,202 $ 5,380 $ 10,797
Pro forma 5,268 5,265 $ 10,575

Basic earnings per share:
As Reported $ 1.11$ .81$1.62
Pro forma $ .94$ .79$1.59

Diluted earnings per share:
As Reported $ 1.11$ .81$1.62
Pro forma $ .94$ .79$1.59
</TABLE>

The fair value of these options was estimated using a Black-Scholes option
pricing model with a risk-free interest rate of 5.5%, a volatility factor of
.422, a dividend yield of 0%, and an expected option life of seven years. There
were no options granted under the Incentive Plan or the Director Plan during
1996.

In October 1997, the Company issued warrants to purchase an aggregate of 171,875
shares of common stock to C. Jim Stewart & Stevenson in connection with the
purchase of the assets of the John Deere construction equipment store. The
warrants are exercisable during the five-year period commencing October 6, 1998,
at an exercise price equal to $12.00 per share. None of these warrants have been
exercised as of December 31, 1998.

In March 1998, the Company issued options to purchase an aggregate of 109,973
shares of common stock to the seller in connection with the purchase of the
stock of D & D Farm and Ranch Supermarket, Inc. The options are exercisable in
four annual installments beginning on the second anniversary of the date of
grant, at exercise prices equal to $9.38, $14.38 and $19.38 per share. None of
these options have been exercised as of December 31, 1998.

71
<PAGE> 72

14. EARNINGS PER SHARE

Earnings per share for all periods have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS
128) which established standards for computing and presenting earnings per share
("EPS") for entities with publicly held common stock or potential common stock.
This statement requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures. Basic
EPS were computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS differs from
basic EPS due to the assumed conversions of potentially dilutive options and
warrants that were outstanding during the period. The following is a
reconciliation of the numerators and the denominators of the basic and diluted
per-share computations for net income.

1997 1998
----------- -----------
<S> <C> <C>
Numerator:
Numerator for basic and dilutive earnings per share-
Net income available to common shareholders $ 5,380,000 $10,797,000
=========== ===========

Denominator:
Denominator for basic earnings per share-
weighted-average shares 6,643,730 6,643,730
Effect of dilutive securities:
Employee stock options 1,503 25,324
Warrants -- 925
----------- -----------
Dilutive potential common shares 1,503 26,249
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 6,645,233 6,669,979

Basic earnings per share $ .81 $ 1.62
=========== ===========

Diluted earnings per share $ .81 $ 1.62
=========== ===========
</TABLE>

There were no potentially dilutive securities outstanding as of December 31,
1996. Warrants and options to purchase shares of common stock that were
outstanding for the years ended December 31, 1996, 1997 and 1998, that were not
included in the computation of diluted earnings per share because the exercise
prices were greater that the average market prices of the common shares, are as
follows:

1996 1997 1998
-------------- -------------- --------------

<S> <C> <C> <C>
Warrants 250,000 421,875 421,875
Options -- 123,313 283,113

Total antidilutive securities 250,000 545,188 704,988
============== ============== ==============
</TABLE>

15. INCOME TAXES:

Prior to the Offering of the Company's common stock, the Company maintained the
status of S corporation for federal and 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.

72
<PAGE> 73

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.

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 year ended December 31, 1996. The
pro forma income tax provision for the year ended December 31, 1996, and actual
tax provision for the years ended December 31, 1996, 1997 and 1998, are
summarized as follows (in thousands):

Pro Forma Actual
---------- ----------
1996 1996 1997 1998
---------- ---------- ---------- ----------
(Unaudited)

<S> <C> <C> <C> <C>
Current provision-
Federal $ 1,002 $ 1,002 $ 2,738 $ 5,652
State 266 266 407 1,090
---------- ---------- ---------- ----------

1,268 1,268 3,145 6,742
---------- ---------- ---------- ----------

Deferred provision-
Federal 1,035 1,035 132 424
State (8) (8) 21 34
---------- ---------- ---------- ----------

1,027 1,027 153 458
---------- ---------- ---------- ----------

Provision for income taxes $ 2,295 $ 2,295 $ 3,298 $ 7,200
========== ========== ========== ==========
</TABLE>

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, 1997 and 1998 (in thousands):

1997 1998
------- -------

<S> <C> <C>
Differences in depreciation and amortization $ 1,648 $ 2,661
Accruals and reserves not deducted for tax purposes until paid (421) (990)
Other, net (47) (33)
------- -------

$ 1,180 $ 1,638
======= =======
</TABLE>

A reconciliation of taxes based on the federal statutory rates and the unaudited
pro forma provisions for income taxes for the year ended December 31, 1996 and
the actual provisions for income taxes for the years ended December 31, 1996,
1997 and 1998, are summarized as follows (in thousands):

Pro Forma Actual
------------ --------
1996 1996 1997 1998
-------- -------- -------- --------
(Unaudited)

<S> <C> <C> <C> <C>
Income taxes at the federal statutory rate $ 2,889 $ 1,897 $ 2,951 $ 6,288
State income taxes, net of federal benefit 216 230 286 719
Other, net 124 168 61 193
-------- -------- -------- --------

Provision for income taxes $ 3,229 $ 2,295 $ 3,298 $ 7,200
======== ======== ======== ========
</TABLE>

73
<PAGE> 74

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 and construction equipment.
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 1998 being limited to
$600,000. The Company provides an allowance for repossession losses and early
repayment penalties.

Finance contracts sold during the years ended December 31, 1996, 1997 and 1998,
were $76,390,000, $91,445,000 and $183,639,000, 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 $25,725. The agreements expire in 1999 through 2001.

17. ACQUISITIONS:

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 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 purchase 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, through March 1999. The
acquisition was accounted for as a purchase.

In October 1997, the Company purchased certain assets and assumed certain
liabilities of C. Jim Stewart & Stevenson, Inc., which consisted of one
full-service John Deere construction equipment dealership in Houston, Texas. The
purchase price was approximately $30.2 million , funded by (i) $4 million of
cash, (ii) $21.1 million of borrowings under the Company's floor plan financing
arrangements, (iii) $3,080,000 in real estate borrowings from a financial
institution, and (iv) a $2,062,500 promissory note payable to the seller. The
Company also issued warrants to purchase an aggregate of 171,875 shares of
common stock to C. Jim Stewart & Stevenson. The warrants are exercisable during
the four-year period commencing October 6, 1998, at an exercise price equal to
$12.00 per share. As the fair value of the warrants was immaterial, it was not
included in the purchase price. The acquisition was accounted for as a purchase.

In March 1998, the Company caused its wholly owned subsidiary, Rush Retail
Centers of Texas, Inc., to acquire the stock of D & D Farm and Ranch
Supermarket, Inc. for approximately $10.5 million, with the purchase price being
a combination of cash and notes payable. The Company also issued options to
purchase an aggregate of 109,973 shares of common stock to the seller. The
options are exercisable during the four-year period commencing March 2, 2000, at
exercise prices ranging from $9.38 to $19.38 per share. As the fair value of the
options was immaterial, it was not included in the purchase price.

74
<PAGE> 75

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 and liabilities at the date of
acquisition as follows (in thousands):

<TABLE>

<S> <C>
Cash $ 3,548
Inventories 4,430
Accounts Receivable & Other Assets 747
Property and equipment 1,729
Accounts Payable and Accrued Expenses (761)
Goodwill 807
--------

Total $ 10,500
========
</TABLE>

In September 1998, the Company purchased substantially all of the assets of
Klooster Equipment, Inc. which consisted of three full-service John Deere
construction equipment dealerships and one retail only location covering 54
counties in Western Michigan. The purchase price was approximately $13.1 million
funded by (i) $2.5 million of cash, (ii) $9.8 million of borrowings under the
Company's floor plan financing arrangements with Associates Commercial Corp. and
John Deere Inc., and (iii) $836,000 of borrowings from John Deere Credit Corp.

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):

<TABLE>

<S> <C>
Inventories $ 10,947
Property and equipment 229
Goodwill 2,000
--------

Total $ 13,176
========
</TABLE>

The following unaudited pro forma summary presents information as if the Denver
Peterbilt, Inc. acquisition, and the C. Jim Stewart & Stevenson acquisition had
occurred at the beginning of fiscal year 1996 and as if the D & D Farm and Ranch
Supermarket, Inc. and the Klooster Equipment, Inc. acquisitions had taken place
at the beginning of fiscal year 1997. 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 1996 and the weighted average common shares
outstanding used in the computation of income 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 years ended December
31, 1996, 1997 and 1998 (unaudited) (in thousands, except per share amounts):

1996 1997 1998
--------- --------- ---------

<S> <C> <C> <C>
Revenues $ 400,407 $ 473,805 $ 630,544
========= ========= =========

Income after pro forma provision for income taxes
$ 3,949 $ 6,150 $ 11,244
========= ========= =========

Basic and diluted income per share $ .71 $ .93 $ 1.69
========= ========= =========
</TABLE>

75
<PAGE> 76

18. UNAUDITED QUARTERLY FINANCIAL DATA:

(In thousands, except per share amounts.)

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

1997

<S> <C> <C> <C> <C>
Operating revenues $ 82,912 $ 95,772 $ 102,145 $ 118,540
Operating income 1,757 2,040 3,210 4,184
Income before income taxes 1,267 1,607 2,673 3,131
Net income 785 997 1,658 1,940
Basic and diluted earnings per share $ .12 $ .15 $ .25 $ .29

1998

Operating revenues $ 126,075 $ 165,983 $ 153,540 $ 167,187
Operating income 3,526 6,121 6,245 7,989
Income before income taxes 2,228 4,551 4,778 6,440
Net income 1,337 2,730 2,868 3,862
Basic and diluted earnings per share $ .20 $ .41 $ .43 $ .58
</TABLE>

19. SEGMENTS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). This statement requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The effective
date for SFAS No. 131 is for fiscal years beginning after December 15, 1997.

The Company has two reportable segments: the Heavy Duty Truck segment and the
Construction Equipment segment. The Heavy Duty Truck segment 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
Construction Equipment segment, formed during 1997, operates a full-service John
Deere dealership that serves the Houston, Texas Metropolitan and surrounding
areas. Dealership operations include the retail sale of new and used equipment,
after-market parts and service facilities, equipment rentals, and the financing
of new and used equipment. The Company had only one segment prior to the 1997
John Deere acquisition, and all of the 1996 results depict only the Heavy Duty
Truck segment.

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

The Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. There were
no material intersegment sales during the years ended December 31, 1997 and
1998.

76
<PAGE> 77

The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Business units
were maintained through expansion and acquisitions. The following table contains
summarized information about reportable segment profit or loss and segment
assets, for the years ended December 31, 1997 and 1998 (in thousands):

HEAVY-DUTY CONSTRUCTION
TRUCK EQUIPMENT
SEGMENT SEGMENT ALL OTHER TOTALS
---------- ---------- ---------- ----------

1997
<S> <C> <C> <C> <C>
Revenues from external customers
$ 381,959 $ 10,166 $ 7,244 $ 399,369
Interest income 1,155 -- -- 1,155
Interest expense 3,043 408 217 3,668
Depreciation and amortization 2,555 77 345 2,977
Segment profit before income tax 8,136 116 426 8,678

Other significant non-cash items:
Segment assets 107,688 39,320 8,470 155,478
Expenditures for segment assets 8,622 242 1,330 10,194

1998
Revenues from external customers
$ 538,209 $ 51,273 $ 23,303 $ 612,785
Interest income 982 -- -- 982
Interest expense 4,163 1,912 791 6,866
Depreciation and amortization 3,665 623 525 4,813
Segment profit before income tax 17,219 562 216 17,997

Other significant non-cash items:
Segment assets $ 133,100 $ 65,419 $ 22,181 $ 220,700
Expenditures for segment assets $ 16,084 $ 1,586 $ 5,237 $ 22,907
</TABLE>

Revenues from segments below the quantitative thresholds are attributable to
four operating segments of the Company. Those segments include a tire company, a
parts distributor, an insurance company, and a hunting lease operation. None of
those segments has ever met any of the quantitative thresholds for determining
reportable segments.

77
<PAGE> 78

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by item 10 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders, under the captions "Election of
Directors" and "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information called for by item 11 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders, under the caption "Compensation of
Executive Officers."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by item 12 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders, under the caption "Principal
Shareholders and Stock Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by item 13 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders, under the caption "Certain
Transactions."

78
<PAGE> 79

PART IV

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

Index to Financial Statements

(a) The following documents are filed as part of this Annual Report or are
incorporated by reference as indicated:

1. The following financial statements are included under Item 8:

Report of Independent Public Accountants

Consolidated Balance Sheets as of December 31, 1997 and 1998

Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998

Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998

Notes to Consolidated Financial Statements.

2. The following financial statement schedules are included under Item 14:

3. Exhibits.

EXHIBIT
NO. IDENTIFICATION OF EXHIBIT

2.1 Asset Purchase Agreement effective October 6, 1997, among Rush
Equipment Centers of Texas, Inc., Rush Enterprises, Inc., C. Jim
Stewart and Stevenson, Inc., and Stewart and Stevenson Realty
Corp. (incorporated by reference herein to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed October 21, 1997).

3.1. Amended and Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the Company's
Registration Statement No. 333-03346 on Form S-1 filed April 10,
1996).

3.2. Bylaws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.2 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

79
<PAGE> 80

4.1. Specimen of certificate representing Common Stock, $.01 par value,
of the Registrant (incorporated herein by reference to Exhibit 4.1
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

4.2. Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant (incorporated herein by reference to
Exhibit 4.2 of the Company's Registration Statement No. 333-03346
on Form S-1 filed April 10, 1996).

4.3. Rights Agreement dated April 8, 1996 between Rush Enterprises,
Inc. and American Stock Transfer & Trust Company, Trustee
(incorporated herein by reference to Exhibit 4.3 of the Company's
Registration Statement No. 333-03346 on Form S-1 filed April 10,
1996).

10.1. Form of Dealer Sales and Service Agreement (heavy-duty truck)
dated October 5, 1995, between Peterbilt Motors Company and Rush
Enterprises, Inc. dba San Antonio Peterbilt-GMC Truck, Inc.
(incorporated herein by reference to Exhibit 10.1 of the Company's
Registration Statement No. 333-03346 on Form S-1 filed April 10,
1996).

10.2. Form of Dealer Sales and Service Agreement (medium-duty truck)
dated October 5, 1995 between Peterbilt Motors Company and Rush
Enterprises, Inc. dba San Antonio Peterbilt -- GMC Trucks, Inc.
(incorporated herein by reference to Exhibit 10.7 of the Company's
Registration Statement No. 333-03346 on Form S-1 filed April 10,
1996).

10.3. GMC Truck Division Dealer Sales and Service Agreement dated July
9, 1992 between General Motors Corporation, GMC Truck Division and
Rush Enterprises, Inc. dba Rush Pontiac -- GMC Truck Center
(incorporated herein by reference to Exhibit 10.13 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.4. GMC Truck Division Dealer Sales and Service Agreement dated
January 17, 1996 between General Motors Corporation, GMC Truck
Division and Rush Enterprises, Inc. dba Oklahoma Trucks, Inc.
(incorporated herein by reference to Exhibit 10.14 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.5. Dealer Sales and Service Agreement dated January 26, 1996 between
Volvo GM Heavy Truck Corporation and Rush Enterprises, Inc.
(incorporated herein by reference to Exhibit 10.15 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.6. Franchise Agreement dated July 28, 1994 between PACCAR Leasing
Corporation and Rush Enterprises, Inc. dba Translease Corp.
(incorporated herein by reference to Exhibit 10.16 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.7. Franchise Agreement Addendum dated December 1, 1995 between PACCAR
Leasing Corporation and Rush Enterprises, Inc. dba Translease
Corp. (incorporated herein by reference to Exhibit 10.17 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.8. Agreement for Acquisition of Secured Retail Installment Paper
dated March 14, 1996 between PACCAR Financial Corp. and South
Coast Peterbilt (incorporated herein by reference to Exhibit 10.18
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.9. Letter Agreement dated January 5, 1996 between Rush Enterprises,
Inc. for South Coast Peterbilt and PACCAR Financial Corp.
(incorporated herein by reference to

80
<PAGE> 81

Exhibit 10.19 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.10. Alternative Reserve Program Letter Agreement dated February 1,
1994 between Associates Commercial Corporation and Rush
Enterprises, Inc. dba San Antonio Truck Sales & Service, Inc.,
Houston Peterbilt, Inc., Lufkin Peterbilt Inc. and South Coast
Peterbilt (incorporated herein by reference to Exhibit 10.20 of
the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.11. Alternative Reserve Program Letter Agreement dated January 1, 1996
between Associates Commercial Corporation and Rush Enterprises,
Inc. (incorporated herein by reference to Exhibit 10.21 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.12. Dealer Agreement for General Motors Retail Truck Financing Plan
for GMC and Chevrolet Dealers effective August 1, 1984 between
Rush Enterprises, Inc. dba San Antonio Truck Sales & Service, Inc.
and Associates Commercial Corporation (incorporated herein by
reference to Exhibit 10.22 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.13. Dealer Agreement dated November 13, 1986 between Associates
Commercial Corporation and Rush Enterprises, Inc. dba San Antonio
Truck Sales & Service, Inc. (incorporated herein by reference to
Exhibit 10.23 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.14. Associates / Rush Enterprises, Inc. Dealer Agreement Addendum
dated December 8, 1986 to Dealer Agreement dated November 13, 1986
between Associates Commercial Corporation and Rush Enterprises,
Inc. dba San Antonio Truck Sales & Service, Inc. (incorporated
herein by reference to Exhibit 10.24 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.15. Form of Dealer Agreement dated January 13, 1988 between Associates
Commercial Corporation and Rush Enterprises, Inc. dba Houston
Peterbilt, Inc. (incorporated herein by reference to Exhibit 10.25
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.16. Form of Peterbilt Distributor Limited Liability Truck Financing
Agreement dated July 21, 1983 between Associates Commercial
Corporation and Rush Enterprises, Inc. dba San Antonio Truck Sales
& Service, Inc. (incorporated herein by reference to Exhibit 10.28
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.17. Dealer Financing Agreement dated July 30, 1993 between Interstate
Billing Service, Inc. and Rush Enterprises, Inc. dba Translease
Corp. (incorporated herein by reference to Exhibit 10.32 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.18. Credit Balance Agreement dated April 3, 1995 between General
Motors Acceptance Corporation and Rush Enterprises, Inc. dba Rush
Pontiac-GMC Truck Center, San Antonio Peterbilt, ARK-LA-TEX
Peterbilt, Houston Peterbilt, Lufkin Peterbilt, Laredo Peterbilt,
Hummer of South Texas and South Coast Peterbilt (incorporated
herein by

81
<PAGE> 82

reference to Exhibit 10.33 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.19. Letter dated March 11, 1996 from General Motors Acceptance
Corporation to Rush Enterprises, Inc. (incorporated herein by
reference to Exhibit 10.34 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.20. Loan Agreement dated June 19, 1995 between General Motors
Acceptance Corporation and Rush Enterprises, Inc. dba San Antonio
Peterbilt-GMC Truck, Inc. (incorporated herein by reference to
Exhibit 10.35 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.21. Promissory Note dated June 19, 1995, in the original principal
amount of $5,000,000, payable by Rush Enterprises, Inc. dba San
Antonio Peterbilt-GMC Truck, Inc. to General Motors Acceptance
Corporation (incorporated herein by reference to Exhibit 10.36 of
the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.22. Wholesale Security Agreement dated June 19, 1995 between General
Motors Acceptance Corporation and Rush Enterprises, Inc. dba San
Antonio Peterbilt-GMC Truck, Inc. (incorporated herein by
reference to Exhibit 10.37 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.23. Agreement Amending the Wholesale Security Agreement dated June 19,
1995 between General Motors Acceptance Corporation and Rush
Enterprises, Inc. dba San Antonio Peterbilt-GMC Truck, Inc.
(incorporated herein by reference to Exhibit 10.38 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.24. Assignment of DPP Vehicle Proceeds dated June 19, 1995 between
General Motors Acceptance Corporation and Rush Enterprises, Inc.
dba San Antonio Peterbilt-GMC Truck, Inc. (incorporated herein by
reference to Exhibit 10.39 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.25. Guaranty Agreement dated June 19, 1995 by W. Marvin Rush on behalf
of Rush Enterprises, Inc. dba San Antonio Peterbilt-GMC Truck,
Inc. and accepted by General Motors Acceptance Corporation
(incorporated herein by reference to Exhibit 10.40 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.26. Revolving Line of Credit Loan and Security Agreement dated
December 1, 1995 between General Motors Acceptance Corporation
and Rush Enterprises, Inc. dba Tulsa Trucks, Inc. in the maximum
principal amount of $1,100,000.00 (incorporated herein by
reference to Exhibit 10.41 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.27. Promissory Note dated December 1, 1995, in the original principal
amount of $1,100,000.00, payable by Rush Enterprises, Inc. dba
Oklahoma Trucks, Inc. to General Motors Acceptance Corporation
(incorporated herein by reference to Exhibit 10.42 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

82
<PAGE> 83

10.28. Wholesale Security Agreement dated November 30, 1995 between
General Motors Acceptance Corporation and Rush Enterprises, Inc.
dba Oklahoma Trucks, Inc. (incorporated herein by reference to
Exhibit 10.43 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.29. Agreement Amending the Wholesale Security Agreement and
Conditionally Authorizing the Sale of New Floor Plan Vehicles on a
Delayed Payment Privilege Basis dated November 30, 1995 between
General Motors Acceptance Corporation and Rush Enterprises, Inc.
dba Oklahoma Trucks, Inc. (incorporated herein by reference to
Exhibit 10.44 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.30. Guaranty dated November 30, 1995 by W. Marvin Rush on behalf of
Rush Enterprises, Inc. dba Oklahoma Trucks, Inc. and accepted by
General Motors Acceptance Corporation (incorporated herein by
reference to Exhibit 10.45 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.31. Revolving Line of Credit Loan and Security Agreement dated
December 1, 1995 between General Motors Acceptance Corporation and
Rush Enterprises, Inc. dba Tulsa Trucks, Inc. in the maximum
principal amount of $900,000.00 (incorporated herein by reference
to Exhibit 10.46 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.32. Promissory Note dated December 1, 1995, in the original principal
amount of $900,000.00, payable by Rush Enterprises, Inc. dba Tulsa
Trucks, Inc. to General Motors Acceptance Corporation
(incorporated herein by reference to Exhibit 10.47 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.33. Wholesale Security Agreement dated November 30, 1995 between
General Motors Acceptance Corporation and Rush Enterprises, Inc.
dba Tulsa Trucks, Inc. (incorporated herein by reference to
Exhibit 10.48 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.34. Agreement Amending the Wholesale Security Agreement and
Conditionally Authorizing the Sale of New Floor Plan Vehicles on a
Delayed Payment Privilege Basis dated November 30, 1995 between
General Motors Acceptance Corporation and Rush Enterprises, Inc.
dba Tulsa Trucks, Inc. (incorporated herein by reference to
Exhibit 10.49 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.35. Guaranty dated November 30, 1995 by W. Marvin Rush on behalf of
Rush Enterprises, Inc. dba Tulsa Trucks, Inc. and accepted by
General Motors Acceptance Corporation (incorporated herein by
reference to Exhibit 10.50 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

83
<PAGE> 84

10.36. Guaranty Agreement dated December 1, 1995 by W. Marvin Rush in
favor of General Motors Acceptance Corporation in the amount of
$2,000,000.00 on behalf of Rush Enterprises, Inc. dba Oklahoma
Trucks, Inc. and Tulsa Trucks, Inc. (incorporated herein by
reference to Exhibit 10.51 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.37. Revolving Line of Credit Loan and Security Agreement dated
December 18, 1995 between Rush Enterprises, Inc. dba Oklahoma
Trucks, Inc. and General Motors Acceptance Corporation in the
maximum principal amount of $800,000.00 (incorporated herein by
reference to Exhibit 10.52 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.38. Promissory Note dated December 18, 1995, in the original principal
amount of $800,000.00, payable by Rush Enterprises, Inc. dba
Oklahoma Trucks, Inc. to General Motors Acceptance Corporation
(incorporated herein by reference to Exhibit 10.53 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.39. Revolving Line of Credit Loan and Security Agreement dated
December 18, 1995 between Rush Enterprises, Inc. dba Tulsa Trucks,
Inc. and General Motors Acceptance Corporation in the maximum
principal amount of $700,000.00 (incorporated herein by reference
to Exhibit 10.54 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.40. Promissory Note dated December 18, 1995, in the original principal
amount of $700,000.00, payable by Rush Enterprises, Inc. dba Tulsa
Trucks, Inc. to General Motors Acceptance Corporation
(incorporated herein by reference to Exhibit 10.55 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.41. Guaranty Agreement dated December 18, 1995 by W. Marvin Rush in
favor of General Motors Acceptance Corporation in the amount of
$1,500,000.00 on behalf of Rush Enterprises, Inc. dba Oklahoma
Trucks, Inc. and Tulsa Trucks, Inc. (incorporated herein by
reference to Exhibit 10.56 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.42. Revolving Promissory Note dated March 18, 1993, in the maximum
principal amount of $450,000.00, payable by Rush Enterprises, Inc.
to The Frost National Bank of San Antonio (incorporated herein by
reference to Exhibit 10.57 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.43. Dealership Purchase Contract dated November 10, 1995 between Kerr
Consolidated, Inc. and Rush Enterprises, Inc. (incorporated herein
by reference to Exhibit 10.58 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.44. Real Estate Purchase Agreement dated November 10, 1995 between
Kerr Consolidated, Inc. and Rush Enterprises, Inc. (incorporated
herein by reference to Exhibit 10.59 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.45. Promissory Note dated December 1, 1995, in the original principal
amount of $2,800,000.00 payable by Rush Enterprises, Inc. to Kerr
Consolidated, Inc. (incorporated herein by reference to Exhibit
10.60 of the Company's Registration Statement No. 333-03346 on
Form S-1 filed April 10, 1996).

84
<PAGE> 85

10.46. Real Estate Mortgage dated December 1, 1995, in the original
principal sum of $2,800,000.00 payable by Rush Enterprises, Inc.
to Kerr Consolidated, Inc. (incorporated herein by reference to
Exhibit 10.61 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.47. Real Estate Lease Agreement effective December 1, 1995 between
Kerr Consolidated, Inc. and Rush Enterprises, Inc. (incorporated
herein by reference to Exhibit 10.62 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.48. Secured Purchase Money Promissory Note dated February 1, 1994, in
the original principal amount of $984,000.00, payable by Rush
Enterprises, Inc. to Engs Motor Truck Company, Inc. (incorporated
herein by reference to Exhibit 10.64 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.49. Continuing Unlimited Guaranty dated February 24, 1994 by W. M.
Rush and Thomas McKellar in favor of Engs Motor Truck Company,
Edward W. Engs and Stewart R. Engs on behalf of South Coast
Peterbilt (incorporated herein by reference to Exhibit 10.65 of
the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.50. Lease Modification Agreement dated February 1, 1994 between
Richard R. Shade and Barbara S. Lateer, Trustees of the Ruth R.
Shade Trust, et al, Engs Motor Truck Company and South Coast
Peterbilt (incorporated herein by reference to Exhibit 10.66 of
the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.51. Lease Modification Agreement dated February 1, 1994 between
Angelus Block Company, Inc., Engs Motor Truck Company and South
Coast Peterbilt (incorporated herein by reference to Exhibit 10.67
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.52. Lease Modification Agreement dated February 1, 1994 between
Angelus Block Company, Inc., Engs Motor Truck Company and South
Coast Peterbilt (incorporated herein by reference to Exhibit 10.68
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.53. Lease dated February 1, 1994 between Edward W. Engs and Stuart R.
Engs, and South Coast Peterbilt (incorporated herein by reference
to Exhibit 10.69 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.54. Lease dated February 1, 1994 between Engs Motor Truck Company and
South Coast Peterbilt (incorporated herein by reference to Exhibit
10.70 of the Company's Registration Statement No. 333-03346 on
Form S-1 filed April 10, 1996).

10.55. Contract Termination and Release dated September 29, 1995 by and
among South Coast Peterbilt, Rush Enterprises, Inc., Tom McKellar,
Inc. and Tom McKellar (incorporated herein by reference to Exhibit
10.71 of the Company's Registration Statement No. 333-03346 on
Form S-1 filed April 10, 1996).

10.56. Termination Agreement dated September 29, 1995 by and among Rush
Enterprises, Inc., Tom McKellar, Inc. and South Coast Peterbilt
(incorporated herein by reference to Exhibit 10.72 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.57. Lease Agreement effective November 1, 1992, between Pete Gallegos
and Rush Enterprises, Inc. dba Laredo Peterbilt, Inc., as amended
August 31, 1994 (incorporated

85
<PAGE> 86

herein by reference to Exhibit 10.73 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.58. Commercial Lease dated July 31, 1992, between R. L. Lehman and
Rush Enterprises, Inc. dba Lufkin Peterbilt, Inc., as amended
through June 1, 1995 (incorporated herein by reference to Exhibit
10.74 of the Company's Registration Statement No. 333-03346 on
Form S-1 filed April 10, 1996).

10.59. Lease Agreement dated September 17, 1993 between McBray Realty,
Inc. and Rush Enterprises, Inc. dba Ark-La-Tex Peterbilt
(incorporated herein by reference to Exhibit 10.75 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.60. Right of First Refusal dated April 1, 1996 between Peterbilt
Motors Company and W. Marvin Rush (incorporated herein by
reference to Exhibit 10.76 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.61. Right of First Refusal dated April 1, 1996 between Peterbilt
Motors Company and Barbara Rush (incorporated herein by reference
to Exhibit 10.77 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.62. Right of First Refusal dated April 1, 1996 between Peterbilt
Motors Company and W. M. "Rusty" Rush (incorporated herein by
reference to Exhibit 10.78 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.63. Right of First Refusal dated April 1, 1996 between Peterbilt
Motors Company and Robin Rush (incorporated herein by reference to
Exhibit 10.79 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.64. Form of Indemnity Agreement between Rush Enterprises, Inc. and the
members of its Board of Directors (incorporated herein by
reference to Exhibit 10.80 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.65. Form of Employment Agreement between W. Marvin Rush, W.M. "Rusty"
Rush and Robin M. Rush (incorporated herein by reference to
Exhibit 10.81 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.66. Form of Employment Agreement between Rush Enterprises, Inc., D.
Jeffery Michell, David C. Orf, B.J. Tanner, Brent Hughes, J.M.
"Spike" Lowe, Donald Teague, Ralph West and John Hiltabiddle
(incorporated herein by reference to Exhibit 10.82 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.67. Tax Indemnification Agreement between Rush Enterprises, Inc.,
Associated Acceptance, Inc. and W. Marvin Rush (incorporated
herein by reference to Exhibit 10.83 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.68. Rush Enterprises, Inc. Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.84 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.69. Form of Rush Enterprises, Inc. Long-Term Incentive Plan Stock
Option Agreement (incorporated herein by reference to Exhibit
10.85 of the Company's Registration Statement No. 333-03346 on
Form S-1 filed April 10, 1996).

10.70. Revolving Line of Credit Loan and Security Agreement dated
February 24, 1994, between General Motors Acceptance Corporation
and Rush Enterprises, Inc. dba South Coast Peterbilt in the
maximum principal amount of $3,000,000.00 (incorporated herein

86
<PAGE> 87

by reference to Exhibit 10.86 of the Company's Registration
Statement No. 333-03346 on Form S-1 filed April 10, 1996).

10.71. Demand Promissory Note dated February 24, 1994, in the original
principal amount of $3,000,000.00, payable by Rush Enterprises,
Inc. dba South Coast Peterbilt to General Motors Acceptance
Corporation (incorporated herein by reference to Exhibit 10.87 of
the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.72. General Security Agreement dated February 2, 1994 between General
Motors Acceptance Corporation and Rush Enterprises, Inc. dba South
Coast Peterbilt (incorporated herein by reference to Exhibit 10.88
of the Company's Registration Statement No. 333-03346 on Form S-1
filed April 10, 1996).

10.73. Guaranty dated February 2, 1994 between General Motors Acceptance
Corporation and Rush Enterprises, Inc. dba South Coast Peterbilt
(incorporated herein by reference to Exhibit 10.89 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.74. Real Estate Lien Note dated July 1, 1993, in the principal amount
of $1,238,000.00, payable by Rush Enterprises, Inc. to Associates
Commercial Corporation (incorporated herein by reference to
Exhibit 10.90 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.75. Promissory Note dated December 7, 1995, in the original principal
amount of $1,900,000.00, payable by Rush Enterprises, Inc. to
General Electric Capital Corporation (incorporated herein by
reference to Exhibit 10.91 of the Company's Registration Statement
No. 333-03346 on Form S-1 filed April 10, 1996).

10.76. Aircraft Chattel Mortgage dated December 4, 1995, as amended,
between Rush Enterprises, Inc. as Mortgagor and General Electric
Capital Corporation as Mortgagee (incorporated herein by reference
to Exhibit 10.92 of the Company's Registration Statement No.
333-03346 on Form S-1 filed April 10, 1996).

10.77. Individual Guaranty dated December 4, 1995, between General
Electric Capital Corporation and Rush Enterprises, Inc.
(incorporated herein by reference to Exhibit 10.93 of the
Company's Registration Statement No. 333-03346 on Form S-1 filed
April 10, 1996).

10.78. Dealership Purchase Contract dated December 9, 1996 by and among
Rush Truck Centers of Colorado, Inc., Rush Enterprises, Inc.,
Denver Peterbilt, Inc., and Greg Lessing. (incorporated herein by
reference to Exhibit 10.78 of the Company's Annual Report on Form
10 K filed March 31, 1998).

*11.1 Computation of pro forma earnings per share.

87
<PAGE> 88

21.1 Subsidiaries of the Company.

Names Under
State of Which Subsidiary
Name Incorporation Does Business
- ------------------------------------ ------------- --------------------------------------
<S> <C> <C>
Rush Truck Centers of Texas, Inc. Delaware Creative Concepts Advertising Agency

Hou-Tex Industrial and Truck Supply

Houston Peterbilt, Inc.

Laredo Peterbilt, Inc.

Lufkin Peterbilt, Inc.

Rush Truck Center

San Antonio Peterbilt, Inc.

San Antonio Peterbilt-GMC Truck, Inc.

Translease

World Wide Tires

Rush Truck Center, Pharr

Rush Peterbilt Truck Center, Beaumont

Rust Truck Center, Beaumont

Rush Peterbilt Truck Center, San Antonio

Rush Truck Center, San Antonio

Rush Peterbilt Truck Center, Houston

Rush Truck Center, Houston

Rush Peterbilt Truck Center, Laredo

Rust Truck Center, Laredo

Rush Peterbilt Truck Center, Lufkin

Rush Truck Center, Lufkin

Rush Peterbilt Truck Center, Pharr

Rush Used Truck Center, Austin

Rush Truck Centers of Oklahoma, Inc. Delaware Oklahoma Trucks, Inc.
Translease

Tulsa Trucks, Inc.

Rush Peterbilt Truck Center, Oklahoma City

Rush Truck Center, Oklahoma City

Rush Peterbilt Truck Center, Tulsa

Rush Truck Center, Tulsa

Rush Volvo Truck Center, Oklahoma City

Rush Volvo Truck Center, Tulsa

Rush Truck Centers of California, Inc., Which Delaware South Coast Peterbilt
Will do Business in California as Complete Translease
Rush Truck Centers World Wide Tires

Rush Peterbilt Truck Center, Pico Rivera

Rush Truck Center, Pico Rivera

Rush Peterbilt Truck Center, Fontana
</TABLE>

88
<PAGE> 89

<TABLE>

Rust Truck Center, Fontana

Rush Peterbilt Truck Center, Sun Valley

Rush Truck Center, Sun Valley

Rush Truck Centers of Louisiana, Inc. Delaware Ark-La-Tex Peterbilt, Inc.
Translease

Rush Peterbilt Truck Center, Bossier City

Rush Truck Center, Bossier City

Los Cuernos, Inc. Delaware Los Cuernos Ranch

Rush Administrative Services, Inc. Delaware None

AiRush, Inc. Delaware None

Rush Truck Leasing, Inc. Delaware Rush Crane Systems

Rush Truck Centers of Colorado, Inc. Delaware Rush Truck Centers, Inc.

Rush Peterbilt Truck Center, Denver

Rust Truck Center, Denver

Rush Peterbilt Truck Center, Greeley

Rush Truck Center, Greeley

Rush Equipment Centers of Texas, Inc. Delaware Rush Equipment Center, Houston

Rush Equipment Center, Beaumont

Rush Equipment Rental Center, San Antonio

Rush Retail Centers, Inc. Delaware D & D Farm & Ranch Supermarket, Inc.

Rush Equipment Centers of Michigan, Inc. Delaware Rush Equipment Center, Ellsworth

Rush Equipment Center, Traverse City

Rush Equipment Center, Grand Rapids

Work `N Play Shop

Rush Equipment Center, Lansing
</TABLE>

*23.1 Consent of Arthur Andersen LLP

*27.1 Financial Data Schedule.

* filed herewith

89
<PAGE> 90

(b) Reports on Form 8-K:

None
90
<PAGE> 91

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: March 26, 1999
----------------------------
W. Marvin Rush
Chairman and Chief Executive Officer

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

Signature Capacity Date
- --------- -------- ----
<S> <S> <C>
/s/ W. MARVIN RUSH Chairman and Chief Executive Officer, March 26, 1999
- ----------------------------- Director (Principal Executive Officer)
W. Marvin Rush

/s/ W. M. "RUSTY" RUSH President, Director March 26, 1999
- -----------------------------
W. M. "Rusty" Rush

/s/ ROBIN M. RUSH Executive Vice President, Secretary, March 26, 1999
- ----------------------------- Treasurer and Director
Robin M. Rush

/s/ RONALD J. KRAUSE Director March 26, 1999
- -----------------------------
Ronald J. Krause

/s/JOHN D. ROCK Director March 26, 1999
- -----------------------------
John D. Rock

/s/HAROLD D. MARSHALL Director March 26, 1999
- -----------------------------
Harold D. Marshall

/s/MARTIN A NAEGELIN, JR. Vice President and March 26, 1999
- ----------------------------- Chief Financial Officer
Martin A. Naegelin, Jr. (Principal Financial and
Accounting Officer)

</TABLE>

91
<PAGE> 92
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11.1 Computation of Net Income and Pro Forma Earnings per share.

23.1 Consent from Independent Public Accountants

27.1 Financial Data Schedule
</TABLE>

<PAGE> 1

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME AND PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)

THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE CALCULATION
Net Income $ 3,862 $ 1,940 $ 10,797 $ 5,380
======== ======== ======== ========

Weighted average number of common shares outstanding 6,644 6,644 6,644 6,644

Earnings per share - Basic $ 0.58 $ 0.29 $ 1.62 $ 0.81
======== ======== ======== ========
DILUTED EARNINGS PER SHARE CALCULATION
Net Income $ 3,862 $ 1,940 $ 10,797 $ 5,380
======== ======== ======== ========

Weighted average number of common shares outstanding 6,644 6,644 6,644 6,644
Weighted average number of common share equivalents
applicable to stock options 29 1 26 1
-------- -------- -------- --------

Common shares and common share equivalents 6,673 6,645 6,670 6,645
======== ======== ======== ========
Earnings per share - Diluted $ 0.58 $ 0.29 $ 1.62 $ 0.81
======== ======== ======== ========
</TABLE>

<PAGE> 1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (SEC File No. 333-07043 and
333-070451).

ARTHUR ANDERSEN LLP

San Antonio, Texas
March 26, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RUSH ENTERPRISES,INC FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITE ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,516
<SECURITIES> 0
<RECEIVABLES> 19,478
<ALLOWANCES> 0
<INVENTORY> 107,140
<CURRENT-ASSETS> 149,741
<PP&E> 65,074
<DEPRECIATION> (10,626)
<TOTAL-ASSETS> 220,700
<CURRENT-LIABILITIES> 134,029
<BONDS> 32,164
0
0
<COMMON> 66
<OTHER-SE> 52,803
<TOTAL-LIABILITY-AND-EQUITY> 220,700
<SALES> 0
<TOTAL-REVENUES> 612,785
<CGS> 508,242
<TOTAL-COSTS> 589,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,884
<INCOME-PRETAX> 17,997
<INCOME-TAX> 7,200
<INCOME-CONTINUING> 10,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,797
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62

</TABLE>