**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


For
      the
      fiscal year ended June 30, 2007


OR


o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


For
      the
      transition period from _________________ to ______________





Commission
      file number: 0-23192















**CELADON
      GROUP, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **13-3361050**(State
                or other jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or organization)
            Identification
                Number)**9503
                East 33rd
                Street****Indianapolis,
                IN**
            **46235**(Address
                of principal executive offices)
            (Zip
                Code)





Registrant’s
      telephone number, including area code:**(317)
      972-7000**





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





Securities
      registered pursuant to Section 12(g) of the Act:


**Common
      Stock ($0.033 par value)**


**Series
      A Junior Participating Preferred Stock Purchase Rights**




Indicate
                  by check mark if the registrant is a well-known seasoned issuer,
                  as
                  defined in Rule 405 of the Securities Act.
              oYes
              x  
                  NoIndicate
                  by check mark if the registrant is not required to file reports
                  pursuant
                  to Section 13 of Section 15(d) of the Act.
              oYes
              xNoIndicate
                  by check mark whether the registrant (1) has filed all reports
                  required to
                  be filed by Section 13 or 15(d) of the Securities Exchange Act
                  of 1934
                  during the preceding 12 months (or for such shorter period that
                  the
                  registrant was required to file such reports), and (2) has been
                  subject to
                  such filing requirements for the past 90
                  days.            xYes         oNoIndicate
                  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 IIIof
                  this Form 10-K or any amendment to this Form
                  10-K.      o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
                    accelerated filer  o
                Accelerated
                    filer  x
                Non-accelerated
                    filer  o
  Indicate
                  by check mark whether the registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Act).
              oYes
              x  
                    No
 
 On
        December 29, 2006, the last business day of the registrant’s most recently
        completed second fiscal quarter, the aggregate market value of the registrant’s
        common stock ($0.033 par value) held by non-affiliates (21,372,114 shares)
        was
        approximately $358 million, based upon the reported last sale price of the
        common stock on that date. The exclusion from such amount of the market value
        of
        shares of common stock owned by any person shall not be deemed an admission
        by
        the registrant that such person is an affiliate of the registrant.
 
 The
        number of outstanding shares of the registrant’s common stock as of the close of
        business on August 28, 2007 was 23,663,211.


DOCUMENTS
      INCORPORATED BY REFERENCE


Part
      III
      of Form 10-K - Portions of Definitive Proxy Statement for the 2007 Annual
      Meeting of Stockholders











**CELADON
      GROUP, INC.**


**FORM
      10-K**





**TABLE
      OF CONTENTS**





**Page****PART
                I****Item
                1.**
            Business
            3**Item
                1A.**
            Risk
                Factors
            9**Item
                1B.**
            Unresolved
                Staff Comments
            14**Item
                2.**
            Properties
            14**Item
                3.**
            Legal
                Proceedings
            15**Item
                4.**
            Submission
                of Matters to a Vote of Security Holders
            15**PART
                II****Item
                5.**
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            16**Item
                6.**
            Selected
                Financial Data
            18**Item
                7.**
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            19**Item
                7A.**
            Quantitative
                and Qualitative Disclosures About Market Risk
            30**Item
                8.**
            Financial
                Statements and Supplementary Data
            31**Item
                9.**
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            55**Item
                9A.**
            Controls
                and Procedures
            55**PART
                III****Item
                10.**
            Directors,
                Executive Officers, and Corporate Governance
            57**Item
                11.**
            Executive
                Compensation
            57**Item
                12.**
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            57**Item
                13.**
            Certain
                Relationships and Related Transactions, and Director
                Independence
            58**Item
                14.**
            Principal
                Accounting Fees and Services
            58**PART
                IV****Item
                15.**
            Exhibits,
                Financial Statement Schedules
            59**SIGNATURES**
            62**Reports
                of Independent Registered Public Accounting Firm**
            32Consolidated
                Balance Sheets
            34Consolidated
                Statements of Operations
            35Consolidated
                Statements of Cash Flows
            36Consolidated
                Statements of Stockholders’ Equity
            37Notes
                to Consolidated Financial Statements
            38





2
 Table
          of Contents


**PART
      I**





**Disclosure
      Regarding Forward Looking Statements**





The
      Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
      forward-looking statements. Certain statements contained in this Form 10-K
      and those portions of the 2007 Proxy Statement incorporated by reference may
      be
      considered forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995 and, as such, involve known and unknown
      risks, uncertainties and other factors which may cause the actual results,
      events, performance, or achievements of the Company to be materially different
      from any future results, events, performance, or achievements expressed or
      implied by such forward-looking statements. Words such as “anticipates,”
“estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” and words or
      terms of similar substance used in connection with any discussion of future
      operating results, financial performance, or business plans identify
      forward-looking statements. All forward-looking statements reflect our
      management’s present expectation of future events and are subject to a number of
      important factors and uncertainties that could cause actual results to differ
      materially from those described in the forward-looking statements. While it
      is
      impossible to identify all factors that may cause actual results to differ,
      the
      risks and uncertainties that may affect the Company’s business, performance, and
      results of operations include the factors discussed in Item 1A of this report.
      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 cautionary statements in this paragraph and elsewhere in this
      Form 10-K.





All
      such
      forward-looking statements speak only as of the date of this Form 10-K. The
      Company expressly disclaims any obligation or undertaking to release publicly
      any updates or revisions to any forward-looking statements contained herein
      to
      reflect any change in the Company’s expectations with regard thereto or any
      change in events, conditions, or circumstances on which any such statement
      is
      based.





For
      these
      statements, we claim the protection of the safe harbor for forward-looking
      statements contained in Section 27A of the Securities Act of 1933, as amended,
      and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), as
      amended.





References
      to the “Company”, “Celadon”, “we”, “us”, “our” and words of similar import refer
      to Celadon Group, Inc. and its consolidated subsidiaries.





**Item
      1.         
Business**





**Introduction**





We
      are
      one of North America’s twenty largest truckload carriers as measured by revenue.
      We generated $502.7 million in operating revenue during our fiscal year
      ended June 30, 2007. We have grown significantly since our incorporation in
      1986
      through internal growth and a series of acquisitions since 1995. As a dry van
      truckload carrier, we generally transport full trailer loads of freight from
      origin to destination without intermediate stops or handling. Our customer
      base
      includes Fortune 500 shippers such as Alcoa, Carrier Corporation, International
      Truck & Engine, John Deere, Kohler Company, Mercedes-Benz, Philip Morris,
      Phillips Lighting, and Wal-Mart.





In
      our
      international operations, we offer time-sensitive transportation in and between
      the United States and its two largest trading partners, Mexico and Canada.
      We
      generated approximately one-half of our revenue in fiscal 2007 from
      international movements, and we believe our annual border crossings make us
      the
      largest provider of international truckload movements in North America. We
      believe that our strategically located terminals and experience with the
      language, culture, and border crossing requirements of each North American
      country provide a competitive advantage in the international trucking
      marketplace.





We
      believe our international operations, particularly those involving Mexico,
      offer
      an attractive business niche for several reasons. The additional complexity
      and
      the need to establish cross-border business partners and to develop a strong
      organization and an adequate infrastructure in Mexico afford some barriers
      to
      competition that are not present in traditional U.S. truckload service. In
      addition, the expected continued growth of Mexico’s economy, particularly
      exports to the U.S., positions us to capitalize on our cross-border
      expertise.


3
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          of Contents


Our
      success is dependent upon the success of our operations in Mexico and Canada,
      and we are subject to risks of doing business internationally, including
      fluctuations in foreign currencies, changes in the economic strength of the
      countries in which we do business, difficulties in enforcing contractual
      obligations and intellectual property rights, burdens of complying with a wide
      variety of international and United States export and import laws, and social,
      political, and economic instability. Additional risks associated with our
      foreign operations, including restrictive trade policies and imposition of
      duties, taxes, or government royalties by foreign governments, are present
      but
      largely mitigated by the terms of NAFTA. Information regarding our revenue
      derived from foreign external customers and long-lived assets located in foreign
      countries is set forth in Note 11 to the consolidated financial statements
      filed
      as part of this report.





In
      addition to our international business, we offer a broad range of truckload
      transportation services within the United States, including long-haul, regional,
      dedicated, and logistics. With the acquisitions of certain assets of Highway
      Express, Inc. (“Highway”) in August 2003, CX Roberson, Inc. (“Roberson”) in
      January 2005, Erin Truckways Ltd., d/b/a Digby Truck Line, Inc. (“Digby”) in
      October 2006, Warrior Services Inc. d/b/a Warrior Xpress (“Warrior”) in February
      2007, and Air Road Express Inc. (“Air Road”) in June 2007, we expanded our
      operations and service offerings within the United States and significantly
      improved our lane density, freight mix, and customer diversity.





We
      also
      operate TruckersB2B, Inc., a profitable marketing business that affords volume
      purchasing power for items such as fuel, tires, and equipment to approximately
      21,000 member trucking fleets representing approximately 455,000 tractors.
      TruckersB2B represents a separate operating segment under generally accepted
      accounting principles. Information regarding revenue, profits and losses, and
      total assets of our transportation and e-commerce (TruckersB2B) operating
      segments is set forth in Note 11 to the consolidated financial statements filed
      as part of this report.





**Operating
      and Sales Strategy**





We
      approach our trucking operations as an integrated effort of marketing, customer
      service, and fleet management. As a part of our strategic plan implemented
      in
      2001, we identified as priorities: increasing our freight rates; decreasing
      our
      reliance on automotive industry customers; raising our service standards;
      rebalancing lane flows to enhance asset utilization; and identifying and
      acquiring suitable acquisition candidates and successfully integrating acquired
      operations. To accomplish these objectives, we have sought to instill high
      levels of discipline, cooperation, and trust between our operations and sales
      departments. As a part of this integrated effort, our operations and sales
      departments have developed the following strategies, goals, and
      objectives:





·
            *Seeking
                high yielding freight from targeted industries, customers, regions,
                and
                lanes that improves our overall network density and diversifies our
                customer and freight mix.* We believe that by focusing our sales
                resources on targeted regions and lanes with emphasis on cross-border
                or
                international moves and a north - south direction, we can improve
                our lane
                density and equipment utilization, increase our average revenue per
                mile,
                and lower our average cost per mile. Each piece of business has rate
                and
                productivity goals that are designed to improve our yield management.
                We
                believe that by increasing the business we do with less cyclical
                shippers
                and reducing our dependency on the automotive industry, our ability
                to
                improve rate per mile increases.·
            *Focusing
                on asset productivity.* Our primary productivity measure is revenue
                per tractor per week. Within revenue per tractor we examine rates,
                non-revenue miles, and loaded miles per tractor. We actively analyze
                customers and freight movements in an effort to enhance the revenue
                production of our tractors. We also attempt to concentrate our equipment
                in defined operating lanes to create more predictable movements,
                reduce
                non-revenue miles, and shorten turn times between loads. As a result
                of
                our efforts over the past several years, automotive parts now comprise
                less of our overall freight mix, having been replaced primarily by
                consumer non-durables and other retail
                products.


4
 Table
          of Contents





·
            *Operating
                a modern fleet to reduce maintenance costs and improve safety and
                driver
                retention.* We believe that updating our tractor and trailer fleets
                has produced several benefits, including lower maintenance expenses,
                and
                enhanced safety, driver recruitment, and retention. We have taken
                two
                important steps towards modernizing our fleet. First, we shortened
                the
                replacement cycle for our tractors from four years to three years.
                Second,
                we have replaced approximately 64% of all of our trailers during
                the last
                3 years. These changes allowed us to recognize significant benefits
                over
                the past few years because maintenance and tire expenses increase
                significantly for tractors beyond the third year of operation and
                for
                trailers beyond the seventh year of operation, as wear and tear increases
                and some warranties expire.·
            *Continuing
                our emphasis on service, safety, and technology.* We offer
                just-in-time, time-definite, and other premium transportation services
                to
                meet the expectations of our service-oriented customers. We believe
                that
                targeting premium service freight permits us to obtain higher rates,
                build
                long-term, service-based customer relationships, and avoid competition
                from railroad, intermodal, and trucking companies that compete primarily
                on the basis of price. We believe our recent safety record has been
                among
                the best in our industry. In March 2006, 2005, and 2003, at the Truckload
                Carriers Association Annual Conference, we were awarded first place
                in
                fleet safety among all truckload fleets that log more than
                100 million miles per year. We have made significant investments in
                technologies that are intended to reduce costs, afford a competitive
                advantage with service-sensitive customers, and promote economies
                of
                scale. Examples of these technologies are Qualcomm satellite-based
                tracking and communications systems, our proprietary CelaTrac system
                that
                enables customers to track shipments and access other information
                via the
                Internet, and document imaging.·
            *Maintaining
                our leading position in cross-border truckload shipments while offering
                diversified, nationwide transportation services in the U.S.* We
                believe our strategically located terminals and experience with the
                languages, cultures, and border crossing requirements of all three
                North
                American countries provide us with competitive advantages in the
                international trucking marketplace. As a result of these advantages,
                we
                believe we are the industry leader in cross-border movements between
                North
                American countries. These cross-border shipments, which comprised
                over 51%
                of our revenue in fiscal 2007, are balanced by a strong and growing
                business with domestic freight from service-sensitive
                customers.·
            *Seeking
                strategic acquisitions to broaden our existing domestic operations.*
                We have made eleven trucking company acquisitions since 1995 (including
                our acquisition of Cheetah Transportation, Inc. which we disposed
                of in
                June 2001), and continue to evaluate acquisition candidates. Our
                current
                acquisition strategy, as evidenced by our purchases of certain assets
                of
                Highway Express in 2003, CX Roberson in 2005, Digby in October 2006,
                Warrior in February 2007, and Air Road in June 2007, is focused on
                broadening our domestic operations through the addition of carriers
                that
                improve our lane density, customer diversity, and service
                offerings.





**Other
      Services**





*TruckersB2B.*
      Our TruckersB2B subsidiary is a profitable marketing business that affords
      volume purchasing power for items such as fuel, tires, insurance, and other
      products and services to small and medium-sized trucking companies through
      its
      website, www.truckersb2b.com. TruckersB2B provides small and medium-sized
      trucking company members with the ability to cut costs and thereby compete
      more
      effectively and profitably with the larger fleets. TruckersB2B has approximately
      21,000 member trucking fleets representing approximately 455,000 tractors.
      Over
      the past six years, TruckersB2B has improved to $10.0 million in revenue and
      an
      operating profit of $1.6 million in fiscal 2007, from $6.7 million in
      revenue and an operating profit of $0.9 million in fiscal 2002. TruckersB2B
      continues to introduce complementary products and services to drive its growth
      and attract new fleets.





*Celadon
      Dedicated Services.* Through Celadon Dedicated Services, we provide
      warehousing and trucking services to three Fortune 500 companies. Our
      warehouse facilities are located near our customers’ manufacturing plants. We
      also transport the manufacturing component parts to our warehouses and sequence
      those parts for our customers. We then transport completed units from our
      customers’ plants.


5
 Table
          of Contents


**Industry
      and Competition**





The
      full
      truckload market is defined by the quantity of goods, generally over 10,000
      pounds, shipped by a single customer point-to-point and is divided into several
      segments by the type of trailer used to transport the goods. These segments
      include van, temperature-controlled, flatbed, and tank carriers. We participate
      in the North American van truckload market. The markets within the United
      States, Canada, and Mexico are fragmented, with thousands of competitors, none
      of whom dominate the market. We believe that the current economic pressures
      will
      continue to force many smaller and private fleets into acquisitions or to exit
      the industry.





Transportation
      of goods by truck between the United States, Canada, and Mexico is subject
      to
      the provisions of NAFTA. Transportation of goods between the United States
      or Canada and Mexico consists of three components: (i) transportation from
      the point of origin to the Mexican border, (ii) transportation across the
      border, and (iii) transportation from the border to the final destination.
      United States and Canadian based carriers may operate within both countries.
      United States and Canadian carriers are not allowed to operate within Mexico,
      and Mexican carriers are not allowed to operate within the United States and
      Canada, in each case except for a 26-kilometer, or approximately 16 miles,
      band
      along either side of the Mexican border. Trailers may cross all borders. We
      are
      one of a limited number of trucking companies that participates in all three
      segments of this cross border market, providing or arranging for door-to-door
      transport service between points in the United States, Canada, and
      Mexico.





The
      truckload industry is highly competitive and fragmented. Although both service
      and price drive competition in the premium long haul, time sensitive portion
      of
      the market, we rely primarily on our high level of service to attract customers.
      This strategy requires us to focus on market segments that employ just-in-time
      inventory systems and other premium services. Our competitors for freight
      include other long-haul truckload carriers and, to a lesser extent, medium-haul
      truckload carriers and railroads. We also compete with other trucking companies
      for the services of drivers. Some of the truckload carriers with which we
      compete have greater financial resources, operate more revenue equipment, and
      carry a larger total volume of freight than we do.





TruckersB2B
      is a business-to-business savings program, for small and mid-sized fleets.
      Competitors include other large trucking companies and other
      business-to-business buying programs.





**Customers**





We
      target
      large service-sensitive customers with time-definite delivery requirements
      throughout the United States, Canada, and Mexico. Our customers frequently
      ship
      in the north-south lanes (i.e., to and from locations in Mexico and locations
      in
      the United States and Eastern Canada). The sales personnel in our offices work
      to source northbound and southbound transport, in addition to other
      transportation solutions. We currently service approximately 2,300 trucking
      customers. Our premium service to these customers is enhanced by the ability
      to
      provide significant trailer capacity where needed, state-of-the-art technology,
      well-maintained tractors and trailers, and 24/7 dispatch and reporting services.
      The principal types of freight transported include tobacco, consumer goods,
      automotive parts, various home products and fixtures, lawn tractors and assorted
      equipment, light bulbs, and various parts for engines.





No
      customer accounted for more than 10% of our total revenue during any of our
      three most recent fiscal years.





**Drivers
      and Personnel**





At
      June
      30, 2007, we employed 3,548 persons, of whom 2,646 were drivers, 185 were truck
      maintenance personnel, 582 were administrative personnel, and 135 were dedicated
      services personnel. None of our U.S. or Canadian employees is represented by
      a
      union or a collective bargaining unit.





6
 Table
          of Contents


Driver
      recruitment, retention, and satisfaction are essential components of our
      success. Competition to recruit and retain drivers is intense in the trucking
      industry. There has been and continues to be a shortage of qualified drivers
      in
      the industry. Drivers are selected in accordance with specific guidelines,
      relating primarily to safety records, driving experience, and personal
      evaluations, including a physical examination and mandatory drug testing. Our
      drivers attend an orientation program and ongoing driver efficiency and safety
      programs. An increase in driver turnover can have a negative impact on our
      results of operations.





Independent
      contractors are utilized through a contract with us to supply one or more
      tractors and drivers for our use. Independent contractors must pay their own
      tractor expenses, fuel, maintenance, and driver costs and must meet our
      specified guidelines with respect to safety. A lease-purchase program offered
      through third party financing sources provides independent contractors the
      opportunity to lease-to-own a tractor. As of June 30, 2007, there were 399
      independent contractors providing a combined 13.2% of our tractor
      capacity.





**Revenue
      Equipment**





Our
      equipment strategy is to utilize late-model tractors and high-capacity trailers,
      actively manage equipment throughout its life cycle, and employ a comprehensive
      service and maintenance program.





We
      have
      determined that the average annual cost of maintenance and tires for tractors
      in
      our fleet rises substantially after the first three years due to a combination
      of greater wear and tear and the expiration of some warranty coverages. We
      believe these costs rise late in the trade cycle for our trailers as well.
      We
      anticipate that we will achieve ongoing savings in maintenance and tire expense
      by replacing tractors and trailers more often. In addition, we believe operating
      newer equipment will enhance our driver recruiting and retention efforts.
      Accordingly, in fiscal 2005 we shortened our normal tractor replacement cycle
      to
      three years of service from four years of service.





The
      average age of our owned and leased tractors and trailers was approximately
      1.6
      and 3.8 years, respectively, at June 30, 2007, and approximately 2.0 and 3.5
      years, respectively, at June 30, 2006. We utilize a comprehensive
      maintenance program to minimize downtime and control maintenance costs.
      Centralized purchasing of spare parts and tires, and centralized control of
      over-the-road repairs are also used to control costs.





**Fuel**





We
      purchase the majority of our fuel through a network of over 500 fuel stops
      throughout the United States and Canada. We have negotiated discounted pricing
      based on certain volume commitments with these fuel stops. We maintain
      bulk-fueling facilities in Indianapolis, Laredo, and Kitchener, Ontario to
      further reduce fuel costs.





Shortages
      of fuel, increases in prices, or rationing of petroleum products can have a
      materially adverse effect on our operations and profitability. Fuel is subject
      to economic, political, climatic, and market factors that are outside of our
      control. We have historically been able to recover a portion of high fuel prices
      from customers in the form of fuel surcharges. However, a portion of the fuel
      expense increase is not recovered due to several factors, including the base
      fuel price levels, which determine when surcharges are collected, truck idling,
      empty miles between freight shipments, and out-of-route miles. We cannot predict
      whether high fuel price levels will occur in the future or the extent to which
      fuel surcharges will be collected to offset such increases.





**Stock
      Splits**





On
      January 18, 2006, the Board of Directors approved a three-for-two stock split,
      effected in the form of a fifty percent (50%) stock dividend. The stock split
      distribution date was February 15, 2006, to stockholders of record as of the
      close of business on February 1, 2006.





On
      May 4,
      2006, the Board of Directors approved a second three-for-two stock split,
      effected in the form of a fifty percent (50%) stock dividend. The second stock
      split distribution date was June 15, 2006, to stockholders of record as of
      the
      close of business of June 1, 2006.





Unless
      otherwise indicated, all share
      and per share amounts have been adjusted to give retroactive effect to these
      stock splits.


7
 Table
          of Contents


**Regulation**





Our
      operations are regulated and licensed by various United States federal and
      state, Canadian provincial, and Mexican federal agencies. Interstate motor
      carrier operations are subject to safety requirements prescribed by the United
      States Department of Transportation (“DOT”). Such matters as weight and
      equipment dimensions are also subject to United States federal and state
      regulation and Canadian provincial regulations. We operate in the United States
      throughout the 48 contiguous states pursuant to operating authority granted
      by
      the Federal Highway Administration, in various Canadian provinces pursuant
      to
      operating authority granted by the Ministries of Transportation and
      Communications in such provinces, and within Mexico pursuant to operating
      authority granted by Secretaria de Communiciones y Transportes. To the extent
      that we conduct operations outside the United States, we are subject to the
      Foreign Corrupt Practices Act, which generally prohibits United States companies
      and their intermediaries from bribing foreign officials for the purpose of
      obtaining or retaining favorable treatment.





New
      rules
      that limit driver hours-of-service were adopted effective January 4, 2004,
      and
      then modified effective October 1, 2005. On July 24, 2007, a federal appeals
      court vacated portions of the 2005 Rules. Two of the key portions vacated
      by the court include the expansion of the driving day from 10 hours to 11 hours,
      and the “34 hour restart” requirement that drivers must have a break of at least
      34 consecutive hours during each week. We understand that the Federal Motor
      Carrier Safety Administration is currently analyzing the court’s decision and
      has until September 14, 2007 to request a hearing on the matter. Although we
      are
      unable to predict whether the order will be appealed or the outcome of any
      such
      appeal, we would expect the court’s decision to reduce productivity and cause
      some loss of efficiency as our drivers are retrained and some shipping lanes
      may
      need to be reconfigured.





Our
      operations are subject to various federal, state, and local environmental laws
      and regulations, implemented principally by the EPA and similar state regulatory
      agencies, governing the management of hazardous wastes, other discharge of
      pollutants into the air and surface and underground waters, and the disposal
      of
      certain substances. We do not believe that compliance with these regulations
      has
      a material effect on our capital expenditures, earnings, and competitive
      position.





In
      addition, the engines used in our newer tractors are subject to emissions
      control regulations issued by the EPA. The regulations require progressive
      reductions in exhaust emissions from diesel engines for 2007 through
      2010. Compliance with such regulations has increased the cost of our new
      tractors and could impair equipment productivity, lower fuel mileage, and
      increase our operating expenses. These adverse effects combined with the
      uncertainty as to the reliability of the vehicles equipped with the newly
      designed diesel engines and the residual values realized from the disposition
      of
      these vehicles could increase our costs or otherwise adversely affect our
      business or operations once the regulations become effective. Some manufacturers
      have significantly increased new equipment prices, in part to meet new engine
      design requirements.





**Cargo
      Liability, Insurance, and Legal Proceedings**





We
      are a
      party to routine litigation incidental to our business, primarily involving
      claims for bodily injury or property damage incurred in the transportation
      of
      freight. We are responsible for the safe delivery of cargo. We have increased
      the self-insured retention portion of our insurance coverage for most claims
      significantly over the past several years. For fiscal 2006 and fiscal 2007,
      we
      renewed our auto liability policy, self-insuring for personal injury and
      property damage claims for amounts up to $2.5 million per occurrence.
      Management believes our uninsured exposure is reasonable for the transportation
      industry, based on previous history.





We
      are
      also responsible for administrative expenses, for each occurrence involving
      personal injury or property damage. We are also self-insured for the full amount
      of all our physical damage losses, for workers’ compensation losses up to $1.5
      million per claim, and for cargo claims up to $100,000 per shipment, except
      for
      a few transportation contracts in which a higher retention may apply. Subject
      to
      these self-insured retention amounts, our current workers’ compensation policy
      provides coverage up to a maximum per claim amount of $10.0 million, and
      our current cargo loss and damage coverage provides coverage up to
      $1.0 million per shipment. We maintain separate insurance in Mexico
      consisting of bodily injury and property damage coverage with acceptable
      deductibles. Management believes our uninsured exposure is reasonable for the
      transportation industry, based on previous history.


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There
      are
      various claims, lawsuits, and pending actions against us and our subsidiaries
      that arise in the normal course of business. We believe many of these
      proceedings are covered in whole or in part by insurance and that none of these
      matters will have a materially adverse effect on our consolidated financial
      position or results of operations in any given period.





**Seasonality**





We
      have
      substantial operations in the Midwestern and Eastern U.S. and Canada. In those
      geographic regions, our tractor productivity may be adversely affected during
      the winter season because inclement weather may impede our operations. Moreover,
      some shippers reduce their shipments during holiday periods as a result of
      curtailed operations or vacation shutdowns. At the same time, operating expenses
      generally increase, with fuel efficiency declining because of engine idling
      and
      harsh weather creating higher accident frequency, increased claims, and more
      equipment repairs.





**Internet
      Website**





We
      maintain an Internet website where additional information concerning our
      business can be found. The address of that website is www.celadontrucking.com.
      All of our reports filed with or furnished to the Securities and Exchange
      Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act,
      including our annual report on Form 10-K, quarterly reports on Form 10-Q, or
      current reports on Form 8-K, and amendments thereto are made available free
      of
      charge on or through our Internet website as soon as reasonably practicable
      after such reports are electronically filed with or furnished to the
      SEC. Information contained on our website is not incorporated into this
      Annual Report on Form 10-K, and you should not consider information contained
      on
      our website to be part of this report.





**Item
      1A.         Risk
      Factors**





Our
      future results may be affected by a number of factors over which we have little
      or no control. The following issues, uncertainties, and risks, among others,
      should be considered in evaluating our business and growth outlook.





**Our
      business is subject to general economic and business factors that are largely
      out of our control, any of which could have a materially adverse effect on
      our
      operating results.**





Our
      business is dependent on a number of factors that may have a materially adverse
      effect on our results of operations, many of which are beyond our control.
      Some
      of the most significant of these factors include excess tractor and trailer
      capacity in the trucking industry, declines in the resale value of used
      equipment, strikes or work stoppages, or work slow downs at our facilities
      or at
      customer, port, border crossing, or other shipping related facilities, increases
      in interest rates, fuel taxes, tolls, and license and registration fees, rising
      costs of healthcare, and fluctuations in foreign exchange rates.





We
      are
      also affected by recessionary economic cycles, changes in customers’ inventory
      levels, and downturns in customers’ business cycles, particularly in market
      segments and industries, such as retail and manufacturing, where we have a
      significant concentration of customers, and regions of the country, such as
      Texas and the Midwest, where we have a significant amount of business. Economic
      conditions may adversely affect our customers and their ability to pay for
      our
      services. Customers encountering adverse economic conditions represent a greater
      potential for loss and we may be required to increase our allowance for doubtful
      accounts. These economic conditions may adversely affect our ability to execute
      our strategic plan.





In
      addition, we cannot predict the effects on the economy or consumer confidence
      of
      actual or threatened armed conflicts or terrorist attacks, efforts to combat
      terrorism, military action against a foreign state or group located in a foreign
      state, or heightened security requirements. Enhanced security measures could
      impair our operating efficiency and productivity and result in higher operating
      costs.





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**Ongoing
      insurance and claims expenses could significantly affect our
      earnings.**





Our
      future insurance and claims expenses may exceed historical levels, which could
      reduce our earnings. We self-insure for a significant portion of our claims
      exposure, which could significantly increase the volatility of, and decrease
      the
      amount of, our earnings. Our future insurance and claims expense could reduce
      our earnings and make our earnings more volatile. We currently self-insure
      for a
      portion of our claims exposure and accrue amounts for liabilities based on
      our
      assessment of claims that arise and our insurance coverage for the periods
      in
      which the claims arise. In general, for casualty claims for fiscal 2007, we
      were
      self-insured for the first $2.5 million of each personal injury and property
      damage claim and the first $100,000 of each cargo claim. We are also responsible
      for a pro rata portion of legal expenses relating to such claims. We maintain
      a
      workers’ compensation plan and group medical plan for our employees with a
      deductible amount of $1.5 million for each workers’ compensation claim and stop
      loss amount of $175,000 for each group medical plan. Because of our significant
      self-insured retention amounts, we have significant exposure to fluctuations
      in
      the number and severity of claims.





We
      maintain insurance above the amounts for which we self-insure with licensed
      insurance carriers. Our insurance and claims expense could increase when our
      current coverage expires or we could raise our self-insured retention. Although
      we believe our aggregate insurance limits are sufficient to cover reasonably
      expected claims, it is possible that one or more claims could exceed those
      limits. If insurance carriers raise our premiums, our insurance and claims
      expense could increase, or we could find it necessary to again raise our
      self-insured retention or decrease our aggregate coverage limits when our
      policies are renewed or replaced. Our operating results and financial condition
      could be materially and adversely affected if these expenses increase, if we
      experience a claim in excess of our coverage limits, or if we experience a
      claim
      for which we do not have coverage.





Ongoing
      insurance requirements could constrain our borrowing capacity. At June 30,
      2007,
      our revolving line of credit had a maximum borrowing limit of $50.0 million,
      outstanding borrowings of $18.0 million, and outstanding letters of credit
      of
      $4.8 million. Our borrowings may increase if we do acquisitions or finance
      more
      of our equipment under our revolving line of credit. Outstanding letters of
      credit with certain financial institutions reduce the available borrowings
      under
      our revolving line of credit, which could negatively affect our liquidity should
      we need to increase our borrowings in the future. In addition, ongoing insurance
      requirements could constrain our borrowing capacity.





**We
      operate in a highly competitive and fragmented industry and our business may
      suffer if we are unable to adequately address downward pricing pressures and
      other results of competition.**





Numerous
      competitive factors could impair our ability to maintain or improve our current
      profitability. These factors include the following:





·
            We
                compete with many other truckload carriers of varying sizes and,
                to a
                lesser extent, with less-than-truckload carriers, railroads, and
                other
                transportation companies, many of which have more equipment and greater
                capital resources than we do.·
            Many
                of our competitors periodically reduce their freight rates to gain
                business, especially during times of reduced growth rates in the
                economy,
                which may limit our ability to maintain or increase freight rates
                or
                maintain significant growth in our business.·
            Many
                customers reduce the number of carriers they use by selecting so-called
                “core carriers” as approved service providers, and in some instances we
                may not be selected.·
            Many
                customers periodically accept bids from multiple carriers for their
                shipping needs, and this process may depress freight rates or result
                in
                the loss of some business to competitors.·
            The
                trend toward consolidation in the trucking industry may create other
                large
                carriers with greater financial resources and other competitive advantages
                relating to their size.·
            Advances
                in technology require increased investments to remain competitive,
                and our
                customers may not be willing to accept higher freight rates to cover
                the
                cost of these investments.


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·
            Competition
                from non-asset-based logistics and freight brokerage companies may
                adversely affect our customer relationships and freight
                rates.·
            Economies
                of scale that may be passed on to smaller carriers by procurement
                aggregation providers may improve their ability to compete with
                us.





**We
      derive a significant portion of our revenue from our major customers, the loss
      of one or more of which could have a materially adverse effect on our
      business.**





A
      significant portion of our revenue is generated from our major customers. For
      2007, our top 25 customers, based on revenue, accounted for approximately 41%
      of
      our revenue, and our top 10 customers, approximately 24% of our revenue. We
      do
      not expect these percentages to change materially for 2008. Generally, we do
      not
      have long term contractual relationships with our major customers, and we cannot
      assure you that our customers will continue to use our services or that they
      will continue at the same levels. For some of our customers, we have entered
      into multi-year contracts and we cannot be assured that the rates will remain
      advantageous. A reduction in or termination of our services by one or more
      of
      our major customers could have a materially adverse effect on our business
      and
      operating results.





**Increases
      in driver compensation or difficulty in attracting and retaining drivers could
      affect our profitability and ability to grow.**





The
      trucking industry experiences substantial difficulty in attracting and retaining
      qualified drivers, including independent contractors. Because of the shortage
      of
      qualified drivers, the availability of alternative jobs, and intense competition
      for drivers from other trucking companies, we expect to continue to face
      difficulty increasing the number of our drivers, including independent
      contractor drivers. The compensation we offer our drivers and independent
      contractors is subject to market conditions, and we may find it necessary to
      increase driver and independent contractor compensation in future periods.
      In
      addition, the Company suffers from a high turnover rate of drivers;
      although our turnover rate is lower than the industry average. A high turnover
      rate requires us to continually recruit a substantial number of drivers in
      order
      to operate existing revenue equipment. If we are unable to continue to attract
      and retain a sufficient number of drivers and independent contractors, we could
      be required to adjust our compensation packages, let trucks sit idle, or operate
      with fewer trucks and face difficulty meeting shipper demands, all of which
      would adversely affect our growth and profitability.





**Our
      revenue growth may not continue at historical rates, which could adversely
      affect our stock price.**





We
      experienced significant growth in revenue between 2002 and 2007. There can
      be no
      assurance that our revenue growth rate will continue at historical levels or
      that we can effectively adapt our management, administrative, and operational
      systems to respond to any future growth. We can provide no assurance that our
      operating margins will not be adversely affected by expansion of our business
      or
      by changes in economic conditions. Slower or less profitable growth could
      adversely affect our stock price.





**We
      operate in a highly regulated industry and increased costs of compliance with,
      or liability for violation of, existing or future regulations could have a
      materially adverse effect on our business.**





Our
      operations are regulated and licensed by various U.S., Canadian, and Mexican
      agencies. Our company drivers and independent contractors also must comply
      with
      the safety and fitness regulations of the United States DOT, including those
      relating to drug and alcohol testing and hours-of-service. Such matters as
      weight and equipment dimensions are also subject to U.S. and Canadian
      regulations. We also may become subject to new or more restrictive regulations
      relating to fuel emissions, drivers’ hours-of-service, ergonomics, or other
      matters affecting safety or operating methods. Other agencies, such as the
      Environmental Protection Agency, or EPA, and the Department of Homeland
      Security, or DHS, also regulate our equipment, operations, and drivers. Future
      laws and regulations may be more stringent and require changes in our operating
      practices, influence the demand for transportation services, or require us
      to
      incur significant additional costs. Higher costs incurred by us or by our
      suppliers who pass the costs onto us through higher prices could adversely
      affect our results of operations.


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The
      DOT,
      through the Federal Motor Carrier Safety Administration, or FMCSA, imposes
      safety and fitness regulations on us and our drivers. On July 24, 2007, a
      federal appeals court vacated portions of the existing rules relating to
      drivers’ hours of service. Two of the key portions that were vacated include the
      expansion of the driving day from 10 hours to 11 hours, and the “34 hour
      restart” requirement that drivers must have a break of at least 34 consecutive
      hours during each week. The court’s decision does not go into effect until
      September 14, 2007, unless the court orders otherwise, and the FMCSA has until
      such date to request a hearing on the matter. We understand that the FMCSA
      is
      currently analyzing the court’s decision, and we are unable to predict whether
      the order will be appealed or the outcome of any such appeal.





If
      the
      court’s decision becomes effective, it may have varying effects, in that
      reducing driving time to 10 hours daily may reduce productivity in some lanes,
      while eliminating the 34-hour restart may enhance productivity in certain
      instances. On the whole, however, we would expect the court’s decision to reduce
      productivity and cause some loss of efficiency as our drivers are retrained
      and
      some shipping lanes may need to be reconfigured. Additionally, we are unable
      to
      predict the effect of any new rules that might be proposed, but any such
      proposed rules could increase costs or decrease productivity.





The
      FMCSA
      also is studying rules relating to braking distance and on-board data recorders
      that could result in new rules being proposed. We are unable to predict the
      effect of any rules that might be proposed, but we expect that any such proposed
      rules would increase costs in our industry, and the on-board recorders
      potentially could decrease productivity and the number of people interested
      in
      being drivers.





Federal,
      state, and municipal authorities have implemented and continue to implement
      various security measures, including checkpoints and travel restrictions on
      large trucks. These regulations also could complicate the matching of available
      equipment with hazardous material shipments, thereby increasing our response
      time on customer orders and our non-revenue miles. As a result, it is possible
      we may fail to meet the needs of our customers or may incur increased expenses
      to do so. These security measures could negatively impact our operating
      results.





Some
      states and municipalities have begun to restrict the locations and amount of
      time where diesel-powered tractors, such as ours, may idle, in order to reduce
      exhaust emissions. These restrictions could force us to alter our drivers’
behavior, purchase on-board power units that do not require the engine to idle,
      or face a decrease in productivity.





**We
      have significant ongoing capital requirements that could affect our
      profitability if we are unable to generate sufficient cash from operations
      and
      obtain financing on favorable terms.**





The
      truckload industry is capital intensive, and our policy of operating newer
      equipment requires us to expend significant amounts annually. If we elect to
      expand our fleet in future periods, our capital needs would increase. We expect
      to pay for projected capital expenditures with operating leases of revenue
      equipment, cash flows from operations, and borrowings under our line of credit.
      If we are unable to generate sufficient cash from operations and obtain
      financing on favorable terms in the future, we may have to limit our growth,
      enter into less favorable financing arrangements, or operate our revenue
      equipment for longer periods, any of which could have a materially adverse
      effect on our profitability.





We
      currently have lease residual value guarantees of approximately $62.7 million,
      substantially all of which are not covered by trade-in or fixed residual
      agreements with the equipment suppliers. We are exposed to decreases in the
      resale value of our used equipment and we have increased exposure to issues
      on
      the significant percentage of our fleet not covered by manufacturer commitments
      which could have a materially adverse effect on our results of
      operations.





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**Fluctuations
      in the price or availability of fuel, as well as hedging activities, surcharge
      collection, and the volume and terms of diesel fuel purchase commitments may
      increase our cost of operation, which could materially and adversely affect
      our
      profitability.**





Fuel
      is
      one of our largest operating expenses. Diesel fuel prices fluctuate greatly
      due
      to economic, political, climatic, and other factors beyond our control. Fuel
      is
      also subject to regional pricing differences and often costs more on the West
      Coast, where we have significant operations. From time-to-time we have used
      fuel
      surcharges, hedging contracts, and volume purchase arrangements to attempt
      to
      limit the effect of price fluctuations. Although we seek to recover a portion
      of
      the short-term increases in fuel prices from customers through fuel surcharges,
      these arrangements do not fully offset the increase in the cost of diesel fuel
      and also may result in us not receiving the full benefit of any fuel price
      decreases. We currently do not have any fuel hedging contracts in place. If
      we
      do hedge, we may be forced to make cash payments under the hedging arrangements.
      Based on current market conditions we have decided to limit our hedging and
      purchase commitments, but we continue to evaluate such measures. The absence
      of
      meaningful fuel price protection through these measures, fluctuations in fuel
      prices, or a shortage of diesel fuel, could materially and adversely affect
      our
      results of operations.





New
      regulations governing exhaust emissions could adversely impact our business.
      New
      emission standards require reductions in the sulfur content of diesel fuel.
      Management expects that a 2% power loss caused by ultra-low-sulfur diesel fuel
      could lead to a loss of 6% mile per gallon fuel economy.





**We
      may not make acquisitions in the future, or if we do, we may not be successful
      in our acquisition strategy.**





We
      have
      made eleven acquisitions. Accordingly, acquisitions have provided a substantial
      portion of our growth. There is no assurance that we will be successful in
      identifying, negotiating, or consummating any future acquisitions. If we fail
      to
      make any future acquisitions, our growth rate could be materially and adversely
      affected.





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





**Increased
      prices, reduced productivity, and restricted availability of new revenue
      equipment may adversely affect our earnings and cash
      flows.**





We
      have
      experienced higher prices for new tractors over the past few years, partially
      as
      a result of government regulations applicable to newly manufactured tractors
      and
      diesel engines, in addition to higher commodity prices and better pricing power
      among equipment manufacturers. More restrictive Environmental Protection Agency,
      or EPA, emissions standards that went into effect in 2007 and emission standards
      that will take effect in 2010 are more restrictive than prior standards and
      will
      require vendors to introduce new engines. Our business could be harmed if we
      are
      unable to continue to obtain an adequate supply of new tractors and trailers
      for
      these or other reasons. As a result, we expect to continue to pay increased
      prices for equipment and incur additional expenses and related financing costs
      for the foreseeable future. Furthermore, the new engines are expected to reduce
      equipment efficiency and lower fuel mileage and, therefore, increase our
      operating expenses.





**Our
      operations are subject to various environmental laws and regulations, the
      violation of which could result in substantial fines or
      penalties.**





In
      addition to direct regulation by the DOT and other agencies, we are subject
      to
      various environmental laws and regulations dealing with the hauling and handling
      of hazardous materials, fuel storage tanks, air emissions from our vehicles
      and
      facilities, and discharge and retention of storm water. We operate in industrial
      areas, where truck terminals and other industrial activities are located, and
      where groundwater or other forms of environmental contamination have occurred.
      Our operations involve the risks of fuel spillage or seepage, environmental
      damage, and hazardous waste disposal, among others. We also maintain underground
      bulk fuel storage tanks and fueling islands at two of our facilities. A small
      percentage of our freight consists of low-grade hazardous substances,
      which


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





**If
      we are unable to retain our key employees, our business, financial condition,
      and results of operations could be adversely affected.**





We
      are
      highly dependent upon the services of certain key employees, including, but
      not
      limited to: Stephen Russell, our Chairman of the Board and Chief Executive
      Officer; Chris Hines, our President and Chief Operating Officer; and Paul Will,
      our Vice Chairman of the Board, Executive Vice President, and Chief Financial
      Officer. Although we have an employment agreement with Mr. Russell and a
      separation agreement with Mr. Will, the loss of any of their services or the
      services of Mr. Hines could negatively impact our operations and future
      profitability.





**Seasonality
      and the impact of weather affect our operations and
      profitability.**





Our
      tractor productivity decreases during the winter season because inclement
      weather impedes operations, and some shippers reduce their shipments after
      the
      winter holiday season. Revenue can also be affected by bad weather and holidays,
      since revenue is directly related to available working days of shippers. At
      the
      same time, operating expenses increase, with fuel efficiency declining because
      of engine idling and harsh weather creating higher accident frequency, increased
      claims, and more equipment repairs. We could also suffer short-term impacts
      from
      weather-related events such as hurricanes, blizzards, ice storms, and floods
      that could harm our results or make our results more volatile. Weather and
      other
      seasonal events could adversely affect our operating results.





**Item
      1B.        Unresolved Staff
      Comments**





None.





**Item
      2.          
Properties**





We
      operate a network of 17 terminal locations, including facilities in Laredo
      and El Paso, Texas, which are the two largest inland freight gateway cities
      between the U.S. and Mexico. Our operating terminals currently are located
      in
      the following cities:





**United
                States**
            
            **Mexico**
            
            **Canada**Baltimore,
                MD (Leased)
            
            Guadalajara
                (Leased)
            
            Kitchener,
                ON (Leased)Dallas,
                TX (Owned)
            
            Mexico
                City (Leased)El Paso,
                TX (Owned)
            
            Monterrey
                (Leased)Greensboro,
                NC (Leased)
            
            Nuevo
                Laredo (Leased)Hampton,
                VA (Leased)
            
            Puebla
                (Leased)Indianapolis,
                IN (Leased)
            
            Silao
                (Leased)Laredo,
                TX (Owned and Leased)Louisville,
                KY (Leased)Richmond,
                VA (Leased)Nashville,
              TN (Leased)





Our
      executive and administrative offices occupy four buildings located on 40 acres
      of property in Indianapolis, Indiana. The Indianapolis, Laredo, and Kitchener
      terminals include administrative functions, lounge facilities for drivers,
      parking, fuel, maintenance, and truck washing facilities. A portion of the
      Indianapolis facility is used for the operations of Truckers B2B. All of our
      other owned and leased facilities are utilized exclusively by our transportation
      segment.





14
 Table
          of Contents


**Item
      3.            Legal
      Proceedings**





See
      discussion under “Cargo Liability, Insurance, and Legal Proceedings” in Item 1,
      and Note 9 to the consolidated financial statements, “Commitments and
      Contingencies.”





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





No
      matters were submitted for a vote of security holders, through the solicitation
      of proxies or otherwise, during the quarter ended June 30, 2007.





15
 Table
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**PART
      II**





**Item
      5.** **Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities**





**Price
      Range of Common Stock**





Our
      common stock is listed on the NASDAQ National Market under the symbol “CLDN.”
The following table sets forth, for the periods indicated, the high and low
      sales price per share of our common stock as reported by NASDAQ.  All
      prices reflect the Company’s February 15, 2006, and June 15, 2006, stock
      splits.





**Fiscal
                2006**
            
            **High**
            
            
            **Low**Quarter
                ended September 30, 2005
            
            $
            10.00
            
            
            $
            7.40Quarter
                ended December 31, 2005
            
            $
            13.29
            
            
            $
            9.52Quarter
                ended March 31, 2006
            
            $
            16.63
            
            
            $
            11.33Quarter
                ended June 30, 2006
            
            $
            23.29
            
            
            $
            14.80**Fiscal
                2007**Quarter
                ended September 30, 2006
            
            $
            23.73
            
            
            $
            14.66Quarter
                ended December 31, 2006
            
            $
            21.00
            
            
            $
            16.08Quarter
                ended March 31, 2007
            
            $
            18.64
            
            
            $
            14.92Quarter
                ended June 30, 2007
            
            $
            17.00
            
            
            $
            15.38





On
      August
      24, 2007, there were 191 holders of our common stock based upon the number
      of
      record holders on that date. However, we estimate our actual number of
      stockholders is much higher because a substantial number of our shares are
      held
      of record by brokers or dealers for their customers in street
      names.





**Dividend
      Policy**





We
      have
      never paid a cash dividend on our common stock, and we do not expect to make
      or
      declare any cash dividends in the foreseeable future. We currently intend to
      continue to retain earnings to finance the growth of our business and reduce
      our
      indebtedness. Our ability to pay cash dividends is currently prohibited by
      restrictions contained in our revolving credit facility. Future payments of
      cash
      dividends will depend on our financial condition, results of operations, capital
      commitments, restrictions under our then-existing debt agreements, and other
      factors our Board of Directors may consider relevant.





We
      recorded two stock dividends in fiscal 2006, reflected as three-for-two stock
      splits, each effected in the form of a 50% stock dividend paid on February
      15,
      2006 and June 15, 2006.


16
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**Company/Index/Peer
                Group**
            
            **6/30/02**
            
            
            **6/30/03**
            
            
            **6/30/04**
            
            
            **6/30/05**
            
            
            **6/30/06**
            
            
            **6/30/07**Celadon
                Group, Inc.
            
            $
            100.00
            
            
            $
            71.00
            
            
            $
            137.93
            
            
            $
            132.45
            
            
            $
            388.64
            
            
            $
            280.37NASDAQ
                Stock Market (U.S.)
            
            $
            100.00
            
            
            $
            109.91
            
            
            $
            139.04
            
            
            $
            141.74
            
            
            $
            155.82
            
            
            $
            191.32NASDAQ
                Trucking & Transportation
            
            $
            100.00
            
            
            $
            111.48
            
            
            $
            142.30
            
            
            $
            161.26
            
            
            $
            222.85
            
            
            $
            239.05





17
 Table
          of Contents


**Item
      6.          
Selected Financial Data**





The
      statements of operations data and balance sheet data presented below have been
      derived from our consolidated financial statements and related notes thereto.
      The information set forth below should be read in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operation” and our
      consolidated financial statements and related notes thereto.





**2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**(in
                thousands, except per share data and operating data)Statements
                of Operations Data:Freight
                revenue(1)
            
            $
            433,012
            
            
            $
            414,465
            
            
            $
            399,656
            
            
            $
            382,918
            
            
            $
            355,692Fuel
                surcharge revenue
            
            
            69,680
            
            
            
            65,729
            
            
            
            37,107
            
            
            
            15,005
            
            
            
            11,413Total
                revenue
            
            
            502,692
            
            
            
            480,194
            
            
            
            436,763
            
            
            
            397,923
            
            
            
            367,105Operating
                expense(2)
            
            
            462,592
            
            
            
            445,966
            
            
            
            413,355
            
            
            
            390,852
            
            
            
            354,371Operating
                income(2)
            
            
            40,100
            
            
            
            34,228
            
            
            
            23,408
            
            
            
            7,071
            
            
            
            12,734Interest
                expense, net(3)
            
            
            3,511
            
            
            
            780
            
            
            
            1,418
            
            
            
            3,723
            
            
            
            6,201Other
                expense (income)
            
            
            109
            
            
            
            34
            
            
            
            13
            
            
            
            180
            
            
            
            (3
            )Income
                before income taxes
            
            
            36,480
            
            
            
            33,414
            
            
            
            21,977
            
            
            
            3,168
            
            
            
            6,536Provision
                for income taxes
            
            
            14,228
            
            
            
            12,866
            
            
            
            9,397
            
            
            
            3,443
            
            
            
            2,948Net
                income (loss)(2)(3)
            
            $
            22,252
            
            
            $
            20,548
            
            
            $
            12,580
            
            
            $
            (275
            )
            
            $
            3,588Diluted
                earnings (loss) per share(2)(3)(4)
            
            $
            0.94
            
            
            $
            0.88
            
            
            $
            0.55
            
            
            $
            (0.02
            )
            
            $
            0.20Weighted
                average diluted shares outstanding(4)
            
            
            23,698
            
            
            
            23,386
            
            
            
            23,013
            
            
            
            17,969
            
            
            
            18,079Balance
                Sheet Data (at end of period):Net
                property and
                equipment
            
            $
            207,499
            
            
            $
            91,267
            
            
            $
            57,545
            
            
            $
            61,801
            
            
            $
            76,967Total
                assets
            
            
            306,913
            
            
            
            190,066
            
            
            
            160,508
            
            
            
            151,310
            
            
            
            162,073Long-term
                debt, revolving
                lines of credit, and capital lease obligations, including current
                maturities
            
            
            94,642
            
            
            
            12,023
            
            
            
            7,344
            
            
            
            14,494
            
            
            
            60,794Stockholders’
                equity
            
            
            147,320
            
            
            
            121,427
            
            
            
            98,491
            
            
            
            82,830
            
            
            
            57,252Operating
                Data:For
                period(5):Average
                revenue per loaded
                mile(6)
            
            $
            1.534
            
            
            $
            1.491
            
            
            $
            1.424
            
            
            $
            1.322
            
            
            $
            1.266Average
                revenue per total
                mile(6)
            
            $
            1.380
            
            
            $
            1.367
            
            
            $
            1.316
            
            
            $
            1.225
            
            
            $
            1.169Average
                revenue per tractor per
                week(6)
            
            $
            2,793
            
            
            $
            2,948
            
            
            $
            2,841
            
            
            $
            2,723
            
            
            $
            2,546Average
                length of
                haul
            
            
            960
            
            
            
            1,004
            
            
            
            995
            
            
            
            994
            
            
            
            942At
                end of period:Total
                tractors(7)
            
            
            3,016
            
            
            
            2,732
            
            
            
            2,570
            
            
            
            2,531
            
            
            
            2,491Average
                age of company
                tractors (in years)
            
            
            1.6
            
            
            
            2.0
            
            
            
            1.9
            
            
            
            2.1
            
            
            
            2.7Total
                trailers(7)
            
            
            7,843
            
            
            
            7,630
            
            
            
            7,468
            
            
            
            6,966
            
            
            
            7,142Average
                age of company
                trailers (in years)
            
            
            3.8
            
            
            
            3.5
            
            
            
            3.6
            
            
            
            4.6
            
            
            
            6.1





__________________________





(1)
            Freight
                revenue is total revenue less fuel surcharges.(2)
            Includes
                a $9.8 million pretax impairment charge relating to the disposition
                of our approximately 1,600 remaining 48-foot trailers, in the year
                ended
                June 30, 2004.(3)
            Includes
                a $0.9 million pretax write-off of loan origination costs relating to
                replacement of a credit facility in the year ended June 30,
                2003.(4)
            Earnings
                per share amounts and weighted average number of shares outstanding
                have
                been adjusted to give retroactive effect to two three-for-two stock
                splits
                effected in the form of a 50% stock dividend paid on February 15,
                2006 and
                June 15, 2006.(5)
            Unless
                otherwise indicated, operating data and statistics presented in this
                table
                and elsewhere in this report are for our truckload revenue and operations
                and exclude revenue and operations of TruckersB2B; our Mexican subsidiary,
                Jaguar; and our less-than truckload, local trucking (or “shuttle”),
                brokerage, and logistics.(6)
            Excludes
                fuel surcharges.(7)
            Total
                fleet, including equipment operated by our Mexican subsidiary,
                Jaguar.





18
 Table
          of Contents


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





**Recent
      Results and Fiscal Year-End Financial Condition**





For
      the
      fiscal year ended June 30, 2007, total revenue increased 4.7%, to $502.7 million
      from $480.2 million during fiscal 2006. Freight revenue, which excludes
      revenue from fuel surcharges, increased 4.5%, to $433.0 million in fiscal 2007
      from $414.5 million in 2006. We generated net income of $22.3 million, or $0.94
      per diluted share, for fiscal 2007 compared with net income of $20.5 million,
      or
      $0.88 per diluted share, for 2006.





We
      believe the improvements in our
      profitability were attributable primarily to growth from acquisitions, cost
      controls, excellent safety and claims experience, and the continued execution
      of
      our operating strategy, which involves allocating our equipment to customers
      and
      freight that provide the most favorable returns. After a strong start in the
      first quarter, the freight market became increasingly challenging in fiscal
      2007.  Decreased freight demand due to a slower economy caused a
      decrease in truck utilization measured by miles per tractor.  In
      addition, shippers used the less robust freight market to resist rate increases
      and, in some cases, attempted to reduce freight rates.  The downward
      pressure on our rates was somewhat offset by a decrease in average length of
      haul.  As a result, average freight revenue per loaded mile excluding
      fuel surcharge for 2007 increased $0.043 per mile to $1.534, a 2.9% increase
      compared with $1.491 for 2006. Average freight revenue per tractor per week,
      our
      main measure of asset productivity, decreased by 5.3% to $2,793 in 2007 compared
      with $2,948 for 2006. This decrease was due to lower general freight demand,
      an
      increase in fleet size to 3,016 tractors at June 30, 2007 from 2,732 tractors
      at
      June 30, 2006, and in increase in non-revenue miles. As the freight market
      weakened and we ran empty miles to on-board the Warrior drivers and position
      equipment for sale, our non-revenue miles increased. Our operating ratio,
      excluding the effect of fuel surcharge, improved to 90.7% for 2007 compared
      with
      91.7% for 2006.





At
      June
      30, 2007, our total balance sheet debt was $94.6 million and our total
      stockholders’ equity was $147.3 million, for a total debt to capitalization
      ratio of 39.1%. At June 30, 2007, we had $27.2 million of available borrowing
      capacity under our revolving credit facility and $1.2 million of cash on
      hand.





**Revenue**





We
      generate substantially all of our revenue by transporting freight for our
      customers. Generally, we are paid by the mile or by the load for our services.
      We also derive revenue from fuel surcharges, loading and unloading activities,
      equipment detention, other trucking related services, and from TruckersB2B.
      The
      main factors that affect our revenue are the revenue per mile we receive from
      our customers, the percentage of miles for which we are compensated, the number
      of tractors operating, and the number of miles we generate with our equipment.
      These factors relate to, among other things, the U.S. economy, inventory levels,
      the level of truck capacity in our markets, specific customer demand, the
      percentage of team-driven tractors in our fleet, driver availability, and our
      average length of haul.





We
      eliminate fuel surcharges from revenue, when calculating operating ratios
      and some of our operating data . We believe that eliminating the impact of
      this
      sometimes volatile source of revenue affords a more consistent basis for
      comparing our results of operations from period to period.





**Expenses
      and Profitability**





The
      main
      factors that impact our profitability on the expense side are the variable
      costs
      of transporting freight for our customers. These costs include fuel expense,
      driver-related expenses, such as wages, benefits, training, and recruitment,
      and
      independent contractor costs, which we record as purchased transportation.
      Expenses that have both fixed and variable components include maintenance and
      tire expense and our total cost of insurance and claims. These expenses
      generally vary with the miles we travel, but also have a controllable component
      based on safety, fleet age, efficiency, and other factors. Our main fixed cost
      is the acquisition and financing of long-term assets, primarily revenue
      equipment. We have other mostly fixed costs, such as our non-driver personnel
      and facilities expenses. In discussing our expenses as a percentage of revenue,
      we sometimes discuss changes as a percentage of revenue before fuel surcharges,
      in addition to absolute dollar changes, because we believe the high variable
      cost nature of our business makes a comparison of changes in expenses as a
      percentage of revenue more meaningful at times than absolute dollar
      changes.





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 Table
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The
      trucking industry has experienced significant increases in expenses over the
      past three years, in particular those relating to equipment costs, driver
      compensation, insurance, and fuel. As the United States economy has expanded,
      many trucking companies have been able to raise freight rates to cover the
      increased costs, although downward rate pressure and less freight demand became
      more prevalent beginning in the fall of 2006.  Over the long term, we
      expect a limited pool of qualified drivers and intense competition to recruit
      and retain those drivers to constrain overall industry
      capacity.  Assuming normal U.S. economic growth in manufacturing,
      retail, and other high volume shipping industries, we expect to be able to
      raise
      freight rates in line with or faster than costs.  Over the near term
      this may prove challenging in the current freight environment.





**Revenue
      Equipment**





We
      operate 3,016 tractors and 7,843 trailers. Of our tractors at June 30, 2007,
      1,184 were owned, 1,433 were acquired under operating leases, and 399 were
      provided by independent contractors, who own and drive their own tractors.
      Of
      our trailers at June 30, 2007, 2,180 were owned and 5,663 were acquired under
      operating and capital leases.





Prior
      to
      fiscal 2006, we had financed most of our new tractors under operating leases.
      Beginning in fiscal 2006 and continuing through fiscal 2007, we have purchased
      most of our new tractors with cash or borrowings.  We expect to
      continue to use cash and borrowings on our credit facility for most tractor
      purchases. Most of our new trailers are acquired with operating leases. These
      leases generally run for a period of seven years for trailers. When we finance
      revenue equipment acquisitions with operating leases, rather than borrowings
      or
      capital leases, the interest component of our financing activities is recorded
      as an “above-the-line” operating expense on our statements of
      operations.  Accordingly, the trend toward financing more equipment
      with cash and borrowings, and less through operating leases, improves our
      operating ratio.





Independent
      contractors (owner operators) provide a tractor and a driver and are responsible
      for all operating expenses in exchange for a fixed payment per mile. We do
      not
      have the capital outlay of purchasing the tractors. The payments to independent
      contractors are recorded in purchased transportation and the payments for
      equipment under operating leases are recorded in revenue equipment rentals.
      Expenses associated with owned equipment, such as interest and depreciation,
      are
      not incurred, and for independent contractor tractors, driver compensation,
      fuel, and other expenses are not incurred. Because obtaining equipment from
      independent contractors and through operating leases effectively shifts these
      expenses from interest to “above the line” operating expenses, we evaluate our
      efficiency using our operating ratio as well as income before income
      taxes.





**Outlook**





Looking
      forward, our profitability goal is to achieve an operating ratio of
      approximately 88%. We expect this to require additional improvements in rate
      per
      mile, non-revenue miles percentage, and miles per tractor compared with those
      key performance indicators for fiscal 2007, to overcome expected additional
      cost
      increases. Because a large percentage of our costs are variable, changes in
      revenue per mile and non-revenue miles percentage affect our profitability
      to a
      greater extent than changes in miles per tractor. For fiscal 2008, the key
      factors that we expect to have the greatest effect on our profitability are
      our
      freight revenue per tractor per week, our compensation of drivers, our cost
      of
      revenue equipment (particularly in light of the 2007 EPA engine requirements),
      our fuel costs, and our insurance and claims. To overcome cost increases and
      improve our margins, we will need to achieve increases in freight revenue per
      tractor, particularly in revenue per mile, which we intend to achieve by
      increasing rates and continuing to shift to more profitable freight.
      Operationally, we will seek improvements in safety and driver recruiting and
      retention. Our success in these areas primarily will affect revenue,
      driver-related expenses, and insurance and claims expense.  Given the
      difficult freight market confronting our industry, we believe achieving our
      profitability goal during fiscal 2008 is unlikely, although we intend to
      continue to strive toward that goal.





20
 Table
          of Contents


**Results
      of Operations**





The
      following tables set forth the percentage relationship of revenue and expense
      items to operating and freight revenue for the periods indicated.





**Fiscal
                year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**Operating
                revenue
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Operating
                expenses:Salaries,
                wages, and employee
                benefits
            
            
            28.8
            
            
            
            30.1
            
            
            
            30.6Fuel
            
            
            23.1
            
            
            
            22.8
            
            
            
            18.7Operations
                and
                maintenance
            
            
            6.4
            
            
            
            6.1
            
            
            
            7.7Insurance
                and
                claims
            
            
            2.6
            
            
            
            2.9
            
            
            
            3.3Depreciation
                and
                amortization
            
            
            4.4
            
            
            
            2.6
            
            
            
            3.4Revenue
                equipment
                rentals
            
            
            6.3
            
            
            
            8.2
            
            
            
            8.2Purchased
                transportation
            
            
            14.7
            
            
            
            14.6
            
            
            
            16.7Cost
                of products and services
                sold
            
            
            1.4
            
            
            
            1.1
            
            
            
            1.1Professional
                and consulting
                fees
            
            
            0.4
            
            
            
            0.6
            
            
            
            0.6Communication
                and
                utilities
            
            
            1.0
            
            
            
            0.9
            
            
            
            1.0Operating
                taxes and
                licenses
            
            
            1.7
            
            
            
            1.7
            
            
            
            1.9General
                and other
                operating
            
            
            1.2
            
            
            
            1.3
            
            
            
            1.4Total
                operating
                expenses
            
            
            92.0
            
            
            
            92.9
            
            
            
            94.6Operating
                income
            
            
            8.0
            
            
            
            7.1
            
            
            
            5.4Other
                expense:Interest
                expense,
                net
            
            
            0.7
            
            
            
            0.1
            
            
            
            0.3Income
                before income taxes
            
            
            7.3
            
            
            
            7.0
            
            
            
            5.1Provision
                for income taxes
            
            
            2.9
            
            
            
            2.7
            
            
            
            2.2Net
                income
            
            
            4.4
            %
            
            
            4.3
            %
            
            
            2.9
            %






Freight
                revenue(1)
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Operating
                expenses:Salaries,
                wages, and employee
                benefits
            
            
            33.5
            
            
            
            34.9
            
            
            
            33.4Fuel
            
            
            10.8
            
            
            
            10.5
            
            
            
            11.1Operations
                and
                maintenance
            
            
            7.5
            
            
            
            7.1
            
            
            
            8.4Insurance
                and
                claims
            
            
            3.0
            
            
            
            3.3
            
            
            
            3.6Depreciation
                and
                amortization
            
            
            5.1
            
            
            
            3.0
            
            
            
            3.7Revenue
                equipment
                rentals
            
            
            7.4
            
            
            
            9.6
            
            
            
            9.0Purchased
                transportation
            
            
            17.0
            
            
            
            17.0
            
            
            
            18.3Cost
                of products and services
                sold
            
            
            1.6
            
            
            
            1.3
            
            
            
            1.2Professional
                and consulting
                fees
            
            
            0.5
            
            
            
            0.7
            
            
            
            0.7Communication
                and
                utilities
            
            
            1.1
            
            
            
            1.0
            
            
            
            1.1Operating
                taxes and
                licenses
            
            
            2.0
            
            
            
            2.0
            
            
            
            2.1General
                and other
                operating
            
            
            1.2
            
            
            
            1.3
            
            
            
            1.5Total
                operating
                expenses
            
            
            90.7
            
            
            
            91.7
            
            
            
            94.1Operating
                income
            
            
            9.3
            
            
            
            8.3
            
            
            
            5.9Other
                expense:Interest
                expense,
                net
            
            
            0.9
            
            
            
            0.2
            
            
            
            0.4Income
                before income taxes
            
            
            8.4
            
            
            
            8.1
            
            
            
            5.5Provision
                for income taxes
            
            
            3.3
            
            
            
            3.1
            
            
            
            2.4Net
                income
            
            
            5.1
            %
            
            
            5.0
            %
            
            
            3.1
            %






(1)
            Freight
                revenue is total operating revenue less fuel surcharges. In this
                table,
                fuel surcharges are eliminated from revenue and subtracted from fuel
                expense. The amounts were $69.7 million, $65.7 million, and $37.1
                million
                in 2007, 2006 and 2005,
                respectively.


21
 Table
          of Contents


**Fiscal
      year ended June 30, 2007, compared with fiscal year ended June 30,
      2006**





Total
      revenue increased by $22.5 million, or 4.7%, to $502.7 million for fiscal
      2007, from $480.2 million for fiscal 2006. Freight revenue excludes $69.7
      million and $65.7 million of fuel surcharge revenue for fiscal 2007 and 2006,
      respectively.





Freight
      revenue increased by $18.5 million, or 4.5%, to $433.0 million for fiscal 2007,
      from $414.5 million for fiscal 2006. This increase was partially attributable
      to
      growth of our tractor fleet through the acquisition of Digby in October 2006,
      Warrior in February 2007, and Air Road in June 2007.  The addition of
      tractors, drivers, and customer relationships from these acquisitions more
      than
      offset softer freight demand generally and the continuation of our efforts
      to
      eliminate the least favorable freight from our system.  The increase
      was helped bya 1.0%
      improvement in average freight revenue per total mile, excluding fuel surcharge,
      to $1.380 from $1.367. The improvement in average freight revenue per total
      mile
      resulted primarily from a decrease in the percentage of our freight comprised
      of
      automotive parts and a corresponding increase in the percentage of our freight
      comprised of consumer non-durables. Average freight revenue per tractor per
      week, excluding fuel surcharge, which is our primary measure of asset
      productivity, decreased 5.3% to $2,793 in fiscal 2007, from $2,948 for fiscal
      2006, as a result of lower general freight demand, an increase of our tractor
      fleet to 3,016 at June 30, 2007, from 2,732 at June 30, 2006, and an increase
      in
      non-revenue miles.  The decrease in miles per tractor and an increase
      in non-revenue mile percentage were attributable to less freight
      demand.





Revenue
      for TruckersB2B was $10.0 million in fiscal 2007, compared to
      $8.3 million in fiscal 2006. The TruckersB2B revenue increase resulted from
      an increase in member usage of the tire discount programs in addition to an
      increase in total fleets using the programs.





Salaries,
      wages, and employee benefits were $144.8 million, or 33.5% of freight
      revenue, for fiscal 2007, compared to $144.6 million, or 34.9% of freight
      revenue, for fiscal 2006. In fiscal 2006, we experienced an increase in our
      salaries, wages, and benefits as a percentage of freight revenue due to
      increased company miles, which increased driver wages, and increased stock-based
      compensation expense. The decrease in stock-based compensation expense in fiscal
      2007, although partially offset by a 2.4% increase in company miles, which
      in
      turn increased driver wages, resulted in this category returning to historical
      levels.





Fuel
      expenses, net of fuel surcharge revenue of $69.7 million and $65.7 million
      for
      fiscal 2007 and fiscal 2006, respectively, increased to $46.6 million, or
      10.8% of freight revenue, for fiscal 2007, compared to $43.5 million, or
      10.5% of freight revenue, for fiscal 2006. These increases were due to an
      increase of 2.4% in company miles and an increase in average fuel prices of
      approximately $0.04 per gallon. In addition, we began to experience lower fuel
      economy and higher costs of fuel from the installation of EPA-mandated new
      engines and use of ultra-low-sulfur diesel fuel. Higher fuel prices and lower
      fuel economy will increase our operating expenses to the extent we cannot offset
      them with surcharges.





Operations
      and maintenance consist of direct operating expense, maintenance, and tire
      expense. This category increased to $32.3 million, or 7.5% of freight
      revenue, for fiscal 2007, from $29.4 million, or 7.1% of freight revenue,
      for fiscal 2006. These increases were due to an increase in the size of our
      tractor fleet, an increase in costs associated with accident repair and various
      direct expenses such as toll expense, cargo handling expense, and increased
      expenses related to harsh weather. These increases were partially offset by
      the
      decrease in our maintenance costs attributable to a younger tractor
      fleet.





Insurance
      and claims expense was $13.1 million, or 3.0% of freight revenue, for fiscal
      2007, compared to $13.7 million, or 3.3% of freight revenue, for fiscal
      2006. Our insurance expense consists of premiums and deductible amounts for
      liability, physical damage, and cargo damage insurance. Our insurance program
      involves self-insurance at various risk retention levels. Claims in excess
      of
      these risk levels are covered by insurance in amounts we consider to be
      adequate. We accrue for the uninsured portion of claims based on known claims
      and historical experience. Insurance and claims expense will vary based
      primarily on the frequency and severity of claims, the level of self-retention,
      and the premium expense.





22
 Table
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Depreciation
      and amortization,
      consisting primarily of depreciation of revenue equipment, increased to
      $21.9 million, or 5.1% of freight revenue, in fiscal 2007 from
      $12.4 million, or 3.0% of freight revenue, for fiscal 2006. The majority of
      these increases can be attributed to the addition of tractors purchased with
      cash and borrowings and the conversion of operating leases to capital leases
      related to approximately 3,700 trailers. The remaining increase in this expense
      category was attributable to the acquisition of certain assets of Digby in
      October 2006, Warrior in February 2007, and Air Road in June 2007. In the third
      and fourth quarters of fiscal 2007, the Company declared its intent to purchase
      certain trailers previously financed with operating leases, resulting in a
      change from operating to capital lease classification. The conversion of the
      trailer leases resulted in a decrease in our revenue equipment rentals. Revenue
      equipment held under operating leases is not reflected on our balance sheet
      and
      the expenses related to such equipment are reflected on our statements of
      operations in revenue equipment rentals, rather than in depreciation and
      amortization and interest expense, as is the case for revenue equipment that
      is
      financed with borrowings or capital leases. In the near term we expect to
      purchase new equipment primarily with cash or finance new trailers with
      operating leases. Accordingly, going forward we expect depreciation and
      amortization will increase as a percentage of freight revenue and revenue
      equipment rentals will decrease as a percentage of freight revenue as
      depreciation expense associated with tractors and trailers acquired with cash
      or
      borrowings will more than offset decreased depreciation resulting from financing
      new trailer acquisitions with operating leases.





Revenue
      equipment rentals were $31.9 million, or 7.4% of freight revenue, in fiscal
      2007, compared to $39.6 million, or 9.6% of freight revenue, for fiscal
      2006. These decreases were attributable to a decrease in our tractor and trailer
      fleet financed under operating leases as discussed under depreciation and
      amortization. As of June 30, 2007, we had financed 1,433 tractors and 1,916
      trailers under operating leases, as compared to 1,440 tractors and 6,453
      trailers as of June 2006. Given the level of new tractors expected to be
      purchased with cash or borrowings and new trailers expected to be financed
      under
      operating leases, we expect revenue equipment rentals will continue to decrease
      going forward.





Purchased
      transportation increased to $73.7 million, or 17.0% of freight revenue, for
      fiscal 2007, from $70.3 million, or 17.0% of freight revenue, for fiscal
      2006. The increase in the overall dollar amount was primarily related to
      increased independent contractor expense, as the number of independent
      contractors increased by 13.7% to 399 at June 30, 2007, from 351 at June 30,
      2006. This increase was partially due to increased payments to independent
      contractors resulting from fuel surcharges collected due to rising fuel costs,
      which are passed through to our independent contractors on a per mile basis.
      Independent contractors are drivers who cover all their operating expenses
      (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment
      per mile. The number of independent contractors has grown over fiscal 2007
      as
      the Company has partnered with several financing companies that are making
      it
      easier for drivers to purchase trucks.





All
      of
      our other expenses are relatively minor in amount, and there were no significant
      changes in these expenses.





Our
      pretax margin, which we believe is a useful measure of our operating performance
      because it is neutral with regard to the method of revenue equipment financing
      that a company uses, improved to 8.4% of freight revenue for fiscal 2007 from
      8.1% for fiscal 2006.





In
      addition to other factors described above, Canadian exchange rate fluctuations
      principally impact salaries, wages, and benefits and purchased transportation
      and, therefore, impact our pretax margin and results of operations.





Income
      taxes increased to $14.2 million for fiscal 2007, from $12.9 million
      for fiscal 2006. Due to the non-deductible effects of our driver per diem pay
      structure, our tax rate will fluctuate from the 35% standard federal rate,
      in
      future periods as income fluctuates.





**Fiscal
      year ended June 30, 2006, compared with fiscal year ended June 30,
      2005**





Total
      revenue increased by $43.4 million, or 9.9%, to $480.2 million for fiscal
      2006, from $436.8 million for fiscal 2005. Freight revenue excludes
      $65.7 million and $37.1 million of fuel surcharge revenue for fiscal 2006
      and 2005, respectively.





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Freight
      revenue increased by $14.8 million, or 3.7%, to $414.5 million for fiscal 2006,
      from $399.7 million for fiscal 2005. This increase was primarily attributable
      to
      a 3.9% improvement in average freight revenue per total mile, excluding fuel
      surcharge, to $1.367 from $1.316. The improvement in average freight revenue
      per
      total mile resulted primarily from better overall freight rates in fiscal 2006
      driven by a favorable relationship between freight demand and truckload
      capacity, a decrease in the percentage of our freight comprised of automotive
      parts and a corresponding increase in the percentage of our freight comprised
      of
      consumer non-durables. Average freight revenue per tractor per week, excluding
      fuel surcharge, which is our primary measure of asset productivity, increased
      3.8% to $2,948 in fiscal 2006, from $2,841 for fiscal 2005, as a result of
      an
      increase in average freight revenue per total mile.





Revenue
      for TruckersB2B was $8.3 million in fiscal 2006, compared to
      $7.8 million in fiscal 2005. The TruckersB2B revenue increase resulted from
      an increase in member usage of the tire discount programs in addition to an
      increase in total fleets using the programs.





Salaries,
      wages, and employee benefits were $144.6 million, or 34.9% of freight
      revenue, for fiscal 2006, compared to $133.6 million, or 33.4% of freight
      revenue, for fiscal 2005. The increase in the overall dollar amount primarily
      was related to a 3.5% increase in company miles, which in turn increased driver
      wages. The remaining increase in this expense category was due to an increase
      in
      the percentage of our fleet comprised of company trucks, and an increase in
      administrative payroll related expenses which includes stock based compensation
      expense.





Fuel
      expenses, net of fuel surcharge revenue of $65.7 million and $37.1 million
      for
      fiscal 2006 and 2005, respectively, decreased to $43.5 million, or 10.5% of
      freight revenue, for fiscal 2006, compared to $44.4 million, or 11.1% of
      freight revenue, for the same period in fiscal 2005. Increased collections
      in
      fuel surcharges offset a 3.5% increase in company miles and an increase in
      average fuel prices of approximately $0.56 per gallon. In fiscal 2007, we expect
      to begin to experience lower fuel economy and potentially higher costs of fuel
      from the installation of EPA-mandated new engines and use of ultra-low-sulfur
      diesel fuel. Higher fuel prices and lower fuel economy will increase our
      operating expenses to the extent we cannot offset them with
      surcharges.





Operations
      and maintenance consist of direct operating expense, maintenance, and tire
      expense. This category decreased to $29.4 million, or 7.1% of freight
      revenue, for fiscal 2006, from $33.7 million, or 8.4% of freight revenue,
      for fiscal 2005. The decreases were primarily the result of our fleet
      upgrade initiative, implementing a tractor trade cycle change from 4 years
      to 3
      years in fiscal 2005, and management changes in our maintenance area. We
      believe there is an opportunity for maintenances expenses to continue to
      decrease as a percentage of freight revenue due to these
      initiatives.





Insurance
      and claims expense was $13.7 million, or 3.3% of freight revenue, for fiscal
      2006, compared to $14.4 million, or 3.6% of freight revenue, for fiscal
      2005. Our insurance expense consists of premiums and deductible amounts for
      liability, physical damage, and cargo damage insurance. Our insurance program
      involves self-insurance at various risk retention levels. Claims in excess
      of
      these risk levels are covered by insurance in amounts we consider to be
      adequate. We accrue for the uninsured portion of claims based on known claims
      and historical experience. Insurance and claims expense will vary based
      primarily on the frequency and severity of claims, the level of self-retention,
      and the premium expense.





Depreciation
      and amortization, consisting primarily of depreciation of revenue equipment,
      decreased to $12.4 million, or 3.0% of freight revenue, in fiscal 2006 from
      $14.9 million, or 3.7% of freight revenue, for fiscal 2005. During fiscal
      2006, a greater percentage of our trailers were held under operating leases,
      rather than owned, compared with fiscal 2005, which reduced depreciation. During
      the last three quarters of fiscal 2006, our use of cash and borrowings to
      acquire tractors began to increase depreciation. In fiscal 2007 we expect
      depreciation to increase and revenue equipment rentals to decrease as a
      percentage of revenue. Because of higher equipment prices and higher interest
      rates (which affect lease payments) we expect our total costs of depreciation
      and amortization to increase in fiscal 2007. Revenue equipment held under
      operating leases is not reflected on our balance sheet and the expenses related
      to such equipment are reflected on our statements of operations in revenue
      equipment rentals, rather than in depreciation and amortization and interest
      expense, as is the case for revenue equipment that is financed with borrowings
      or capital leases.





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Revenue
      equipment rentals were $39.6 million, or 9.6% of freight revenue, in fiscal
      2006, compared to $35.8 million, or 9.0% of freight revenue, for fiscal
      2005. These increases were attributable to a higher proportion of our trailer
      fleet held under operating leases during the 2006 period, partially offset
      by
      the decreased use of operating leases to finance tractors. As of June 30,
      2006, we had financed 1,440 tractors and 6,453 trailers under operating leases,
      as compared to 1,836 tractors and 5,583 trailers as of June 2005. Given the
      level of new tractors purchased with cash or borrowings under our credit
      facility and new trailers financed under operating leases, we expect revenue
      equipment rentals will decrease going forward.





Purchased
      transportation decreased to $70.3 million, or 17.0% of freight revenue, for
      fiscal 2006, from $73.0 million, or 18.3% of freight revenue, for fiscal
      2005. These decreases were primarily related to reduced independent contractor
      expense, as the number of independent contractors decreased to 351 at June
      30,
      2006, from 378 at June 30, 2005. This decrease was partially offset due to
      increased payments to independent contractors resulting from fuel surcharges
      collected due to rising fuel costs, which are passed through to our independent
      contractors on a per mile basis. Independent contractors are drivers who cover
      all their operating expenses (fuel, driver salaries, maintenance, and equipment
      costs) for a fixed payment per mile. We expect the majority of our equipment
      additions to come in our company-operated fleet. As a result, the percentage
      of
      our fleet comprised of independent contractors may continue to decline, with
      a
      corresponding decrease in this expense category. It has become difficult to
      recruit and retain independent contractors.





All
      of
      our other expenses are relatively minor in amount, and there were no significant
      changes in these expenses.





Our
      pretax margin, which we believe is a useful measure of our operating performance
      because it is neutral with regard to the method of revenue equipment financing
      that a company uses, improved to 8.1% of freight revenue for fiscal 2006 from
      5.5% for fiscal 2005.





In
      addition to other factors described above, Canadian exchange rate fluctuations
      principally impact salaries, wages, and benefits and purchased transportation
      and, therefore, impact our pretax margin and results of operations.





Income
      taxes increased to $12.9 million for fiscal 2006, from $9.4 million
      for fiscal 2005. Due to the non-deductible effects of our driver per diem pay
      structure, our tax rate will fluctuate from the 35% standard federal rate,
      in
      future periods as income fluctuates.





**Liquidity
      and Capital Resources**





Trucking
      is a capital-intensive business. We require cash to fund our operating expenses
      (other than depreciation and amortization), to make capital expenditures and
      acquisitions, and to repay debt, including principal and interest payments.
      Other than ordinary operating expenses, we anticipate that capital expenditures
      for the acquisition of revenue equipment will constitute our primary cash
      requirement over the next twelve months. We frequently consider potential
      acquisitions, and if we were to consummate an acquisition, our cash requirements
      would increase and we may have to modify our expected financing sources for
      the
      purchase of tractors. Subject to any required lender approval, we may make
      acquisitions, although we do not have any specific acquisition plans at this
      time. Our principal sources of liquidity are cash generated from operations,
      bank borrowings, capital and operating lease financing of revenue equipment,
      and
      proceeds from the sale of used revenue equipment.





As
      of
      June 30, 2007, we had on order 125 tractors and 1,500 trailers for delivery
      through fiscal 2008. These revenue equipment orders represent a capital
      commitment of approximately $45.2 million, before considering the proceeds
      of
      equipment dispositions. In fiscal 2007, we purchased most of our new tractors,
      and we acquired most of the new trailers under off-balance sheet operating
      leases. In the third and fourth quarters of fiscal 2007, we also declared our
      intent to purchase approximately 3,700 trailers at the end of the respective
      lease term, resulting in a change from operating lease to capital lease
      classification. At June 30, 2007, our total balance sheet debt, including
      capital lease obligations and current maturities, was $94.6 million, compared
      to
      $12.0 million at June 30, 2006, and $7.3 million at June 30,
      2005. Our debt-to-capitalization ratio (total balance sheet debt as a percentage
      of total balance sheet debt plus total stockholders’ equity) was 39.1% at
      June 30, 2007, 9.0% at June 30, 2006, and 6.9% at June 30,
      2005.





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We
      believe we will be able to fund our operating expenses, as well as our current
      commitments for the acquisition of revenue equipment, over the next twelve
      months with a combination of cash generated from operations, borrowings
      available under secured equipment financing or our primary credit facility,
      equipment sales, and lease financing arrangements. We will continue to have
      significant capital requirements over the long term, and the availability of
      the
      needed capital will depend upon our financial condition and operating results
      and numerous other factors over which we have limited or no control, including
      prevailing market conditions and the market price of our common stock. However,
      based on our operating results, anticipated future cash flows, current
      availability under our credit facility, and sources of equipment lease financing
      that we expect will be available to us, we do not expect to experience
      significant liquidity constraints in the foreseeable future.





**Cash
      Flows**





We
      generated net cash from operating activities of $53.6 million in fiscal
      2007, $30.7 million in fiscal 2006, and $28.4 million in fiscal 2005.
      The increase in net cash provided by operations in fiscal 2007 from fiscal
      2006
      is due primarily to the increase of depreciation and amortization and an
      increase in deferred taxes due to accelerated depreciation from purchasing
      tractors.





Net
      cash
      used in investing activities was $61.2 million for fiscal 2007, compared to
      $44.3 million for fiscal 2006, and $9.6 million for fiscal 2005.
      Approximately $32.4 million of the cash used in investing activities for fiscal
      2007 was related to our purchases of Digby in October 2006, Warrior in February
      2007, and Air Road in June 2007. Approximately $22.7 million of the cash
      used in investing activities for fiscal 2005 was related to our purchase of
      certain assets of CX Roberson in January of 2005. Cash used in (provided by)
      investing activities includes the net cash effect of acquisitions and
      dispositions of revenue equipment during each year. Capital expenditures
      primarily for tractors and trailers (including lease buyouts and new equipment
      purchases) totaled $66.8 million in fiscal 2007, excluding the assets
      purchased from Digby, Warrior, and Air Road, $95.8 million in fiscal 2006,
      and
      $25.2 million in fiscal 2005, including the value of equipment purchased under
      capital leases and excluding the assets purchased from CX Roberson. We generated
      proceeds from the sale of property and equipment of $37.9 million in fiscal
      2007, $51.4 million in fiscal 2006, and $39.8 million in fiscal 2005
      (including $7.6 million from the CX Roberson acquisition).





Net
      cash
      provided by financing activities was $7.2 million in fiscal 2007, compared
      to $4.2 million in fiscal 2006, and net cash used of $8.0 million in
      fiscal 2005. Financing activity represents bank borrowings (new borrowings,
      net
      of repayments) and payment of the principal component of capital lease
      obligations.





**Off-Balance
      Sheet Arrangements**





Operating
      leases have been an important source of financing for our revenue equipment.
      Our
      operating leases include some under which we do not guarantee the value of
      the
      asset at the end of the lease term (“walk-away leases”) and some under which we
      do guarantee the value of the asset at the end of the lease term (“residual
      value”). Therefore, we are subject to the risk that equipment value may decline
      in which case we would suffer a loss upon disposition and be required to make
      cash payments because of the residual value guarantees. We were obligated for
      residual value guarantees related to operating leases of $62.7 million at
      June 30, 2007 compared to $78.7 million at June 30, 2006. A small portion
      of these amounts is covered by repurchase and/or trade agreements we have with
      the equipment manufacturer. We believe that any residual payment obligations
      that are not covered by the manufacturer will be satisfied, in the aggregate,
      by
      the value of the related equipment at the end of the lease. To the extent the
      expected value at the lease termination date is lower than the residual
      value guarantee, we would accrue for the difference over the remaining lease
      term. We anticipate that going forward we will use cash generated from
      operations to finance tractor purchases and operating leases to finance trailer
      purchases.





Prior
      to
      fiscal 2006, we financed most of our new tractors and trailers under operating
      leases, which are not reflected on our balance sheet. In fiscal 2006, we began
      purchasing most of our new tractors using cash and borrowings under our credit
      facility, while still financing our new trailers with operating leases. The
      use
      of operating leases also affects our statement of cash flows. For assets subject
      to these operating leases, we do not record depreciation as an increase to
      net
      cash provided by operations, nor do we record any entry with respect to
      investing activities or financing activities.





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**Primary
      Credit Agreement**





On
      September 26, 2005, the Company, Celadon Trucking Services, Inc. (“CTSI”),
      Celadon Logistics Services, Inc. (“CLSI”), and TruckersB2B entered into an
      unsecured Credit Agreement with LaSalle Bank National Association, as
      administrative agent, and LaSalle Bank National Association, Fifth Third Bank
      (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures
      on
      September 24, 2010 (the “Credit Agreement”). The Credit Agreement was used to
      refinance the Company’s then-existing credit facility and was intended to
      provide for ongoing working capital needs and general corporate purposes.
      Borrowings under the Credit Agreement are based, at the option of the Company,
      on a base rate equal to the greater of the federal funds rate plus 0.5% and
      the
      administrative agent’s prime rate or LIBOR plus an applicable margin between
      0.75% and 1.125% that is adjusted quarterly based on cash flow coverage. The
      Credit Agreement is guaranteed by Celadon E-Commerce, Inc., Celadon Canada,
      Inc.
      (“CelCan”), and Servicios de Transportation Jaguar, S.A. de C.V., (“Jaguar”),
      each of which is a subsidiary of the Company.





The
      Credit Agreement has a maximum revolving borrowing limit of $50.0 million,
      and
      the Company may increase the revolving borrowing limit by an additional $20.0
      million, to a total of $70.0 million. Letters of credit are limited to an
      aggregate commitment of $15.0 million and a swing line facility has a limit
      of
      $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and
      0.225% per annum based on cash flow coverage is due on the daily unused portion
      of the Credit Agreement. The Credit Agreement contains certain restrictions
      and
      covenants relating to, among other things, dividends, tangible net worth, cash
      flow, mergers, consolidations, acquisitions and dispositions, and total
      indebtedness. We were in compliance with these covenants at June 30, 2007,
      and
      expect to remain in compliance for the foreseeable future. At June 30, 2007,
      $18.0 million of our credit facility was utilized as outstanding borrowings
      and
      $4.8 million was utilized for standby letters of credit.





We
      believe we will be able to fund our operating expenses, as well as our current
      commitments for the acquisition of revenue equipment in connection with our
      fleet upgrade over the next twelve months with a combination of cash generated
      from operations, borrowings available under our primary credit facility, and
      lease financing arrangements. We will continue to have significant capital
      requirements over the long term, and the availability of the needed capital
      will
      depend upon our financial condition and operating results and numerous other
      factors over which we have limited or no control, including prevailing market
      conditions and the market price of our common stock. However, based on our
      improving operating results, anticipated future cash flows, current availability
      under our credit facility, and sources of equipment lease financing that we
      expect will be available to us, we do not expect to experience significant
      liquidity constraints in the foreseeable future.





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**Contractual
      Obligations and Commitments**





As
      of
      June 30, 2007, our bank loans, capitalized leases, operating leases, other
      debts, and future commitments have stated maturities or minimum annual payments
      as follows:





**Cash
                Requirements**
              **as
                of June 30, 2007**
              **(in
                thousands)**
              **Payments
                Due by Period****Total**
            
            
            **Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Three**
              **Years**
            
            
            **Three**
              **to
                Five**
              **Years**
            
            
            **More
                Than**
              **Five**
              **Years**Operating
                leases
            
            $
            72,406
            
            
            $
            24,056
            
            
            $
            21,491
            
            
            $
            11,647
            
            
            $
            15,212Lease
                residual value guarantees
            
            
            62,736
            
            
            
            15,092
            
            
            
            30,592
            
            
            
            ---
            
            
            
            17,052Capital
                lease obligations(1)
            
            
            63,363
            
            
            
            8,630
            
            
            
            17,134
            
            
            
            35,767
            
            
            
            1,832Long-term
                debt (1)
            
            
            42,036
            
            
            
            12,597
            
            
            
            11,040
            
            
            
            18,399
            
            
            
            ---Sub-total
            
            
            240,541
            
            
            
            60,375
            
            
            
            80,257
            
            
            
            65,813
            
            
            
            34,096Future
                purchase of revenue equipment
            
            
            45,150
            
            
            
            12,703
            
            
            
            5,812
            
            
            
            5,811
            
            
            
            20,824Employment
                and consulting agreements(2)
            
            
            793
            
            
            
            717
            
            
            
            76
            
            
            
            ---
            
            
            
            ---Standby
                letters of credit
            
            
            4,825
            
            
            
            4,825
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
                contractual and cash obligations
            
            $
            291,309
            
            
            $
            78,620
            
            
            $
            86,145
            
            
            $
            71,624
            
            
            $
            54,920





(1)
            Includes
                interest.(2)
            The
                amounts reflected in the table do not include amounts that could
                become
                payable to our Chief Executive Officer and Chief Financial Officer,
                under
                certain circumstances if their employment by the Company is
                terminated.





**Inflation**





Many
      of
      our operating expenses, including fuel costs and revenue equipment, are
      sensitive to the effects of inflation, which result in higher operating costs
      and reduced operating income. The effects of inflation on our business during
      the past three years were most significant in fuel. We have limited the effects
      of inflation through increases in freight rates and fuel
      surcharges.





**Critical
      Accounting Policies**





The
      preparation of our financial statements in conformity with U.S. generally
      accepted accounting principles requires us to make estimates and
      assumptions that impact the amounts reported in our consolidated financial
      statements and accompanying notes. Therefore, the reported amounts of assets,
      liabilities, revenues, expenses, and associated disclosures of contingent assets
      and liabilities are affected by these estimates and assumptions. We evaluate
      these estimates and assumptions on an ongoing basis, utilizing historical
      experience, consultation with experts, and other methods considered reasonable
      in the particular circumstances. Nevertheless, actual results may differ
      significantly from our estimates and assumptions, and it is possible that
      materially different amounts would be reported using differing estimates or
      assumptions. We consider our critical accounting policies to be those that
      require us to make more significant judgments and estimates when we prepare
      our
      financial statements. Our critical accounting policies include the
      following:





*Depreciation
      of Property and Equipment.* We depreciate our property and equipment using
      the straight-line method over the estimated useful life of the asset. We
      generally use estimated useful lives of 2 to 7 years for new tractors and
      trailers, and estimated salvage values for new tractors and trailers generally
      range from 35% to 50% of the capitalized cost. Useful lives and salvage values
      for equipment obtained through acquisitions are considered separately on a
      case-by-case basis.  Gains and losses on the disposal of revenue
      equipment are included in depreciation expense in our statements of
      operations.





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We
      review
      the reasonableness of our estimates regarding useful lives and salvage values
      of
      our revenue equipment and other long-lived assets based upon, among other
      things, our experience with similar assets, conditions in the used equipment
      market, and prevailing industry practice. Changes in our useful life or salvage
      value estimates or fluctuations in market values that are not reflected in
      our
      estimates, could have a material effect on our results of
      operations.





Revenue
      equipment and other long-lived assets are tested for impairment whenever an
      event occurs that indicates an impairment may exist. Expected future cash flows
      are used to analyze whether an impairment has occurred. If the sum of expected
      undiscounted cash flows is less than the carrying value of the long-lived asset,
      then an impairment loss is recognized. We measure the impairment loss by
      comparing the fair value of the asset to its carrying value. Fair value is
      determined based on a discounted cash flow analysis or the appraised or
      estimated market value of the asset, as appropriate.





*Operating
      leases.* We have financed a substantial percentage of our tractors and
      trailers with operating leases. These leases generally contain residual value
      guarantees, which provide that the value of equipment returned to the lessor
      at
      the end of the lease term will be no lower than a negotiated amount. To the
      extent that the value of the equipment is below the negotiated amount, we are
      liable to the lessor for the shortage at the expiration of the lease. For
      approximately 9% of our tractors under operating lease, we have residual value
      guarantees from the manufacturer at amounts equal to our residual obligation
      to
      the lessors. For all other equipment (or to the extent we believe any
      manufacturer will refuse or be unable to meet its obligation), we are required
      to recognize additional rental expense to the extent we believe the fair market
      value at the lease termination will be less than our obligation to the
      lessor.





In
      accordance with Statement of Financial Accounting Standards (“SFAS”) 13,
“*Accounting for Leases*,” property and equipment held under operating
      leases, and liabilities related thereto, are not reflected on our balance sheet.
      All expenses related to revenue equipment operating leases are reflected on
      our
      statements of operations in the line item entitled “Revenue equipment rentals.”
As such, financing revenue equipment with operating leases instead of bank
      borrowings or capital leases effectively moves the interest component of the
      financing arrangement into operating expenses on our statements of
      operations.





*Claims
      Reserves and Estimates.* The primary claims arising for us consist of cargo
      liability, personal injury, property damage, collision and comprehensive,
      workers’ compensation, and employee medical expenses. We maintain self-insurance
      levels for these various areas of risk and have established reserves to cover
      these self-insured liabilities. We also maintain insurance to cover liabilities
      in excess of these self-insurance amounts. Claims reserves represent accruals
      for the estimated uninsured portion of reported claims, including adverse
      development of reported claims, as well as estimates of incurred but not
      reported claims. Reported claims and related loss reserves are estimated by
      third party administrators, and we refer to these estimates in establishing
      our
      reserves. Claims incurred but not reported are estimated based on our historical
      experience and industry trends, which are continually monitored, and accruals
      are adjusted when warranted by changes in facts and circumstances. In
      establishing our reserves we must take into account and estimate various
      factors, including, but not limited to, assumptions concerning the nature and
      severity of the claim, the effect of the jurisdiction on any award or
      settlement, the length of time until ultimate resolution, inflation rates in
      health care, and in general interest rates, legal expenses, and other factors.
      Our actual experience may be different than our estimates, sometimes
      significantly. Changes in assumptions as well as changes in actual experience
      could cause these estimates to change in the near term. Insurance and claims
      expense will vary from period to period based on the severity and frequency
      of
      claims incurred in a given period.





*Accounting
      for Income Taxes.* Deferred income taxes represent a substantial liability
      on our consolidated balance sheet. Deferred income taxes are determined in
      accordance with SFAS No. 109, “*Accounting for Income Taxes*.” Deferred
      tax assets and liabilities are recognized for the expected future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases, and operating loss and tax credit carry-forwards. We evaluate our tax
      assets and liabilities on a periodic basis and adjust these balances as
      appropriate. We believe that we have adequately provided for our future tax
      consequences based upon current facts and circumstances and current tax law.
      However, should our tax positions be challenged and not prevail, different
      outcomes could result and have a significant impact on the amounts reported
      in
      our consolidated financial statements.





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The
      carrying value of our deferred tax assets (tax benefits expected to be realized
      in the future) assumes that we will be able to generate, based on certain
      estimates and assumptions, sufficient future taxable income in certain tax
      jurisdictions to utilize these deferred tax benefits. If these estimates and
      related assumptions change in the future, we may be required to reduce the
      value
      of the deferred tax assets resulting in additional income tax expense. We
      believe that it is more likely than not that the deferred tax assets, net of
      valuation allowance, will be realized, based on forecasted income. However,
      there can be no assurance that we will meet our forecasts of future income.
      We
      evaluate the deferred tax assets on a periodic basis and assess the need for
      additional valuation allowances.





Federal
      income taxes are provided on that portion of the income of foreign subsidiaries
      that is expected to be remitted to the United States.





**Recent
      Accounting Pronouncements**





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, *The Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS 159”). SFAS 159 permits entities to choose to measure
      certain financial assets and liabilities at fair value. Unrealized gains and
      losses on items for which the fair value option has been elected are reported
      in
      earnings. SFAS 159 is effective for fiscal years beginning after November 15,
      2007. The Company is currently assessing the expected impact of adopting SFAS
      159 on our consolidated financial position and results of operations when it
      becomes effective.





In
      September 2006, FASB issued SFAS (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles (“GAAP”) and
      expands disclosures about fair value measurements. This statement was published
      due to the different definitions of fair value and the limited guidance for
      applying those definitions in GAAP that are among the many accounting
      pronouncements that require fair value measurements. SFAS 157 defines fair
      value
      as the price that would be received to sell an asset or paid to transfer a
      liability in an orderly transaction between market participants at the
      measurement date. This statement is effective for financial statements issued
      for fiscal years beginning after November 15, 2007. Additionally, prospective
      application of this statement is required as of the beginning of the fiscal
      year
      in which it is initially applied. SFAS 157 is not expected to have a material
      impact upon our financial position, results of operations and cash
      flows.




In
      September 2006, FASB issued SFAS No.
      158, *Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and
      132(R).* This statement requires an employer to recognize the overfunded or
      underfunded status of a defined benefit postretirement plan (other than a
      multiemployer plan) as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur through comprehensive income of a business entity. This statement
      also requires an employer to measure the funded status of a plan as of the
      date
      of its year-end statement of financial position, with limited exceptions. The
      provisions of SFAS No. 158 are effective as of the end of the fiscal year ending
      after December 15, 2006. As of June 30, 2007, management believes that SFAS
      No.
      158 will have no effect on the financial position, results of operations, and
      cash flows of the Company.





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”). FIN
      48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Our effective date of this interpretation
      is
      July 1, 2007, the first fiscal year beginning after December 15, 2006. We are
      continuing to evaluate the impact of the adoption of FIN 48 on our consolidated
      financial statements.  Based on our current evaluation we do not
      expect a material impact on our financials.





**Item
      7A.        Quantitative and
      Qualitative Disclosures About Market Risk**





We
      experience various market risks, including changes in interest rates, foreign
      currency exchange rates, and fuel prices. We do not enter into derivatives
      or
      other financial instruments for trading or speculative purposes, nor when there
      are no underlying related exposures.





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 Table
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*Interest
      Rate Risk.* We are exposed to interest rate risk principally from our
      primary credit facility. The credit facility carries a maximum variable interest
      rate of either the bank’s base rate or LIBOR plus 1.125%. At June 30, 2007, the
      interest rate for revolving borrowings under our credit facility was LIBOR
      plus
      0.875%. At June 30, 2007, we had $18.0 million variable rate term loan
      borrowings outstanding under the credit facility. A hypothetical 10% increase
      in
      the bank’s base rate and LIBOR would be immaterial to our net
      income.





*Foreign
      Currency Exchange Rate Risk.* We are subject to foreign currency exchange
      rate risk, specifically in connection with our Canadian operations. While
      virtually all of the expenses associated with our Canadian operations, such
      as
      independent contractor costs, company driver compensation, and administrative
      costs, are paid in Canadian dollars, a significant portion of our revenue
      generated from those operations is billed in U.S. dollars because many of our
      customers are U.S. shippers transporting goods to or from Canada. As a result,
      increases in the Canadian dollar exchange rate adversely affect the
      profitability of our Canadian operations. Assuming revenue and expenses for
      our
      Canadian operations identical to the year ended June 30, 2007 (both in terms
      of
      amount and currency mix), we estimate that a $0.01 increase in the Canadian
      dollar exchange rate would reduce our annual net income by approximately
      $156,000.  As of June 30, 2007, we had none of our currency exposure
      hedged.





We
      generally do not face the same magnitude of foreign currency exchange rate
      risk
      in connection with our intra-Mexico operations conducted through our Mexican
      subsidiary, Jaguar, because our foreign currency revenues are generally
      proportionate to our foreign currency expenses for those operations. For
      purposes of consolidation, however, the operating results earned by our
      subsidiaries, including Jaguar, in foreign currencies are converted into United
      States dollars. As a result, a decrease in the value of the Mexican peso could
      adversely affect our consolidated results of operations. Assuming revenue and
      expenses for our Mexican operations identical to the year ended June 30, 2007
      (both in terms of amount and currency mix), we estimate that a $0.01 decrease
      in
      the Mexican peso exchange rate would reduce our annual net income by
      approximately $66,000.





*Commodity
      Price Risk.* Shortages of fuel, increases in prices, or rationing of
      petroleum products can have a materially adverse effect on our operations and
      profitability. Fuel is subject to economic, political, and market factors that
      are outside of our control. Historically, we have sought to recover a portion
      of
      short-term increases in fuel prices from customers through the collection of
      fuel surcharges. However, fuel surcharges do not always fully offset increases
      in fuel prices. In addition, from time-to-time we may enter into derivative
      financial instruments to reduce our exposure to fuel price fluctuations. As
      of
      June 30, 2007, we had none of our estimated fuel purchases hedged.





**Item
      8.          
Financial Statements and Supplementary Data**





The
      following statements are filed with this report:





Reports
      of Independent Registered Public Accounting Firm - KPMG LLP;


Consolidated
      Balance Sheets;


Consolidated
      Statements of Operations;


Consolidated
      Statements of Cash Flows;


Consolidated
      Statements of Stockholders’ Equity; and


Notes
      to
      Consolidated Financial Statements.





31
 Table
          of Contents








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








The
      Board
      of Directors and Stockholders of Celadon Group, Inc.





We
      have
      audited the accompanying Consolidated Balance Sheets of Celadon Group, Inc.
      and
      subsidiaries as of June 30, 2007 and 2006, and the related Consolidated
      Statements of Operations, Stockholders’ Equity, and Cash Flows for each of
      the years in the three-year period ended June 30, 2007. In connection with
      our audits of the Consolidated Financial Statements, we also have audited
      the Consolidated Financial Statement schedule listed in the Index at Item
      15. These Consolidated Financial Statements and financial statement
      schedule are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these Consolidated Financial
      Statements and financial statement schedule based on our audits.





We
      conducted our audits in accordance with the standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that we plan and perform the audit to obtain reasonable assurance about
      whether the financial statements are free of material misstatement. An
      audit includes examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements. An audit also includes assessing
      the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the Consolidated Financial Statements referred to above present fairly,
      in all material respects, the financial position of Celadon Group, Inc. and
      subsidiaries as of June 30, 2007 and 2006, and the results of their
      operations and their cash flows for each of the years in the three-year
      period ended June 30, 2007, in conformity with U.S. generally accepted
      accounting principles. Also in our opinion, the related consolidated
      financial statement schedule, when considered in relation to the basic
      Consolidated Financial Statements taken as a whole, presents fairly, in all
      material respects, the information set forth therein.





As
      discussed in Note 7 to the consolidated financial statements, the Company
      adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
      Share-Based Payment, effective July 1, 2005 for accounting for share-based
      payments.





We
      also
      have audited, in accordance with the standards of the Public
      Company Accounting Oversight Board (United States), the effectiveness of
      Celadon Group, Inc. and subsidiaries’ internal control over financial
      reporting as of June 30, 2007, based on criteria established in
*Internal Control – Integrated Framework*issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO), and our report
      dated August 29, 2007, expressed an unqualified opinion on management’s
      assessment of, and the effective operation of, internal control over
      financial reporting.








/s/
      KPMG,
      LLP





Indianapolis,
      Indiana


August
      29, 2007











32
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          of Contents


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








The
      Board
      of Directors and Stockholders of Celadon Group, Inc.





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting set forth in Item 9A of
      Celadon Group, Inc.’s Annual Report on Form 10-K for the year ended June 30,
      2007, that Celadon Group, Inc. and subsidiaries maintained effective
      internal control over financial reporting as of June 30, 2007, based on criteria
      established in *Internal
      Control-Integrated****Framework***issued by
      the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). The Company’s management is responsible for maintaining
      effective internal control over financial reporting and for its assessment
      of the effectiveness of internal control over financial reporting. Our
      responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that we plan and perform the audit to obtain reasonable assurance about
      whether effective internal control over financial reporting was maintained
      in all material respects. Our audit included obtaining an understanding of
      internal control over financial reporting, evaluating management’s assessment,
      testing and evaluating the design and operating effectiveness of internal
      control, and performing such other procedures as we considered necessary in
      the circumstances. We believe that our audit provides a reasonable basis
      for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in accordance with generally accepted accounting principles. A company’s
      internal control over financial reporting includes those policies
      and procedures that (1) pertain to the maintenance of records that, in
      reasonable detail, accurately and fairly reflect the transactions and
      dispositions of the assets of the company; (2) provide reasonable assurance
      that transactions are recorded as necessary to permit preparation of
      financial statements in accordance with generally accepted accounting
      principles, and that receipts and expenditures of the company are being
      made only in accordance with authorizations of management and directors of
      the company; and (3) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use, or disposition of the
      company’s assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may
      become inadequate because of changes in conditions, or that the degree of
      compliance with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that Celadon Group, Inc. and
      subsidiaries maintained effective internal control over financial reporting
      as of June 30, 2007, is fairly stated, in all material respects, based on
      criteria established in *Internal Control – Integrated Framewor**k*issued by the Committee of Sponsoring Organizations of
      the Treadway
      Commission (COSO). Also, in our opinion, Celadon Group, Inc. and
      subsidiaries maintained, in all material respects, effective internal
      control over financial reporting as of June 30, 2007, based on
      criteria established in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO).





We
      also
      have audited, in accordance with the standards of the Public
      Company Accounting Oversight Board (United States), the Consolidated
      Balance Sheets of Celadon Group,Inc. and subsidiaries as of June 30, 2007 and
      2006, and the related Consolidated Statements of Operations, Stockholders’
Equity, and Cash Flows for each of the years in the three-year period ended
      June 30, 2007, and our report dated August 29, 2007, expressed an unqualified
      opinion on those consolidated financial statements.





/s/
      KPMG,
      LLP





Indianapolis,
      Indiana


August
      29, 2007


33
 Table
          of Contents





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**June
      30, 2007 and 2006**


**(Dollars
      in thousands)**





**ASSETS**
            
            **2007**
            
            
            **2006**Current
                assets:Cash
                and cash
                equivalents
            
            $
            1,190
            
            
            $
            1,674Trade
                receivables, net of
                allowance for doubtful accounts of $1,176 and $1,269 in 2007 and
                2006,
                respectively
            
            
            59,387
            
            
            
            55,462Prepaid
                expenses and other
                current assets
            
            
            10,616
            
            
            
            10,132Tires
                in
                service
            
            
            3,012
            
            
            
            2,737Equipment
                held for
                resale
            
            
            11,154
            
            
            
            ---Income
                tax
                receivable
            
            
            1,526
            
            
            
            5,216Deferred
                income
                taxes
            
            
            2,021
            
            
            
            1,867Total
                current assets
            
            
            88,906
            
            
            
            77,088Property
                and equipment
            
            
            240,898
            
            
            
            121,733Less
                accumulated depreciation and amortization
            
            
            44,553
            
            
            
            30,466Net
                property and equipment
            
            
            196,345
            
            
            
            91,267Tires
                in service
            
            
            1,449
            
            
            
            1,569Goodwill
            
            
            19,137
            
            
            
            19,137Other
                assets
            
            
            1,076
            
            
            
            1,005Total
                assets
            
            $
            306,913
            
            
            $
            190,066**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            7,959
            
            
            $
            4,369Accrued
                salaries and
                benefits
            
            
            11,779
            
            
            
            16,808Accrued
                insurance and
                claims
            
            
            6,274
            
            
            
            7,048Accrued
                fuel
                expense
            
            
            6,425
            
            
            
            6,481Other
                accrued
                expenses
            
            
            12,157
            
            
            
            12,018Current
                maturities of
                long-term debt
            
            
            10,736
            
            
            
            975Current
                maturities of capital
                lease obligations
            
            
            6,228
            
            
            
            507Total
                current liabilities
            
            
            61,558
            
            
            
            48,206Long-term
                debt, net of current
                maturities
            
            
            28,886
            
            
            
            9,608Capital
                lease obligations, net
                of current maturities
            
            
            48,792
            
            
            
            933Deferred
                income
                taxes
            
            
            20,332
            
            
            
            9,867Minority
                interest
            
            
            25
            
            
            
            25Stockholders’
                equity:Preferred
                stock, $1.00 par
                value, authorized 404,966 shares; no shares issued and
                outstanding
            
            
            ---
            
            
            
            ---Common
                stock, $0.033 par
                value, authorized 40,000,000 shares; issued and outstanding 23,581,245
                and
                23,111,367 shares at June 30, 2007 and 2006,
                respectively
            
            
            778
            
            
            
            763Additional
                paid-in
                capital
            
            
            93,582
            
            
            
            90,828Retained
                earnings
            
            
            54,345
            
            
            
            32,092Accumulated
                other
                comprehensive loss
            
            
            (1,385
            )
            
            
            (2,256
            )Total
                stockholders’ equity
            
            
            147,320
            
            
            
            121,427Total
                liabilities and stockholders’ equity
            
            $
            306,913
            
            
            $
            190,066





See
      accompanying notes to consolidated financial statements.





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 Table
          of Contents


**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
      ended June 30, 2007, 2006, and 2005**


**(Dollars
      and shares in thousands, except per share amounts)**





**2007**
            
            
            **2006**
            
            
            **2005**Revenue:Freight
                revenue
            
            $
            433,012
            
            
            $
            414,465
            
            
            $
            399,656Fuel
                surcharges
            
            
            69,680
            
            
            
            65,729
            
            
            
            37,107Total
                revenue
            
            
            502,692
            
            
            
            480,194
            
            
            
            436,763Operating
                expenses:Salaries,
                wages, and employee
                benefits
            
            
            144,845
            
            
            
            144,634
            
            
            
            133,565Fuel
            
            
            116,251
            
            
            
            109,253
            
            
            
            81,517Operations
                and
                maintenance
            
            
            32,299
            
            
            
            29,411
            
            
            
            33,742Insurance
                and
                claims
            
            
            13,054
            
            
            
            13,697
            
            
            
            14,375Depreciation
                and
                amortization
            
            
            21,880
            
            
            
            12,442
            
            
            
            14,870Revenue
                equipment
                rentals
            
            
            31,900
            
            
            
            39,601
            
            
            
            35,848Purchased
                transportation
            
            
            73,699
            
            
            
            70,305
            
            
            
            73,012Cost
                of products and services
                sold
            
            
            6,961
            
            
            
            5,433
            
            
            
            4,807Professional
                and consulting
                fees
            
            
            2,249
            
            
            
            2,698
            
            
            
            2,624Communications
                and
                utilities
            
            
            4,838
            
            
            
            4,148
            
            
            
            4,218Operating
                taxes and
                licenses
            
            
            8,629
            
            
            
            8,247
            
            
            
            8,507General
                and other
                operating
            
            
            5,987
            
            
            
            6,097
            
            
            
            6,270Total
                operating
                expenses
            
            
            462,592
            
            
            
            445,966
            
            
            
            413,355Operating
                income
            
            
            40,100
            
            
            
            34,228
            
            
            
            23,408Other
                (income) expense:Interest
                income
            
            
            (21
            )
            
            
            (153
            )
            
            
            (12
            )Interest
                expense
            
            
            3,532
            
            
            
            933
            
            
            
            1,430Other
            
            
            109
            
            
            
            34
            
            
            
            13Income
                before income taxes
            
            
            36,480
            
            
            
            33,414
            
            
            
            21,977Provision
                for income taxes
            
            
            14,228
            
            
            
            12,866
            
            
            
            9,397Net
                income
            
            $
            22,252
            
            
            $
            20,548
            
            
            $
            12,580Earnings
                per common share:Diluted
                earnings per share(1)
            
            $
            0.94
            
            
            $
            0.88
            
            
            $
            0.55Basic
                earnings per share(1)
            
            $
            0.96
            
            
            $
            0.90
            
            
            $
            0.56Weighted
                average shares outstanding:Diluted(1)
            
            
            23,698
            
            
            
            23,386
            
            
            
            23,013Basic(1)
            
            
            23,252
            
            
            
            22,828
            
            
            
            22,286


_________________________





(1)
            Earnings
                per share amounts and average number of shares outstanding have been
                adjusted to give retroactive effect to the three-for-two stock splits
                effected in the form of a 50% stock dividend paid on February 15,
                2006 and
                June 15, 2006.





See
      accompanying notes to consolidated financial statements.





35
 Table
          of Contents





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      ended June 30, 2007, 2006, and 2005**


**(Dollars
      in thousands)**





**2007**
            
            
            **2006**
            
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            22,252
            
            
            $
            20,548
            
            
            $
            12,580Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and
                amortization
            
            
            21,625
            
            
            
            12,985
            
            
            
            14,027(Gain)
                loss on sale of
                equipment
            
            
            255
            
            
            
            (543
            )
            
            
            843Provision
                (benefit) for
                deferred income taxes
            
            
            10,311
            
            
            
            2,017
            
            
            
            (880
            )Provision
                for doubtful
                accounts
            
            
            366
            
            
            
            786
            
            
            
            736Stock
                based compensation
                expense
            
            
            1,827
            
            
            
            5,059
            
            
            
            (177
            )Changes
                in assets and
                liabilities:Trade
                receivables
            
            
            (4,291
            )
            
            
            (488
            )
            
            
            (4,248
            )Income
                tax
                receivable
            
            
            3,690
            
            
            
            (5,216
            )
            
            
            ---Tires
                in service
            
            
            (154
            )
            
            
            741
            
            
            
            1,196Prepaid
                expenses and other
                current assets
            
            
            (484
            )
            
            
            (3,805
            )
            
            
            2,512Other
                assets
            
            
            381
            
            
            
            1,164
            
            
            
            258Accounts
                payable and accrued
                expenses
            
            
            (2,185
            )
            
            
            (639
            )
            
            
            4,266Income
                tax
                payable
            
            
            ---
            
            
            
            (1,957
            )
            
            
            (2,676
            )Net
                cash provided by operating
                activities
            
            
            53,593
            
            
            
            30,652
            
            
            
            28,437Cash
                flows from investing activities:Purchase
                of property and
                equipment
            
            
            (66,783
            )
            
            
            (95,753
            )
            
            
            (25,214
            )Proceeds
                on sale of property
                and equipment
            
            
            37,933
            
            
            
            51,417
            
            
            
            39,803Purchase
                of minority shares of
                subsidiary
            
            
            ---
            
            
            
            ---
            
            
            
            (1,525
            )Purchase
                of
                businesses
            
            
            (32,383
            )
            
            
            ---
            
            
            
            (22,700
            )Net
                cash used in investing
                activities
            
            
            (61,233
            )
            
            
            (44,336
            )
            
            
            (9,636
            )Cash
                flows from financing activities:Proceeds
                from issuance of
                common stock
            
            
            985
            
            
            
            1,060
            
            
            
            2,026Tax
                benefit from issuance of
                common stock
            
            
            12
            
            
            
            635
            
            
            
            436Proceeds
                of long-term
                debt
            
            
            13,250
            
            
            
            4,750
            
            
            
            ---Payments
                on long-term
                debt
            
            
            (4,180
            )
            
            
            (1,354
            )
            
            
            (7,235
            )Principal
                payments on capital
                lease obligations
            
            
            (2,911
            )
            
            
            (848
            )
            
            
            (3,269
            )Net
                cash provided by (used in)
                financing activities
            
            
            7,156
            
            
            
            4,243
            
            
            
            (8,042
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (484
            )
            
            
            (9,441
            )
            
            
            10,759Cash
                and cash equivalents at beginning of year
            
            
            1,674
            
            
            
            11,115
            
            
            
            356Cash
                and cash equivalents at end of year
            
            $
            1,190
            
            
            $
            1,674
            
            
            $
            11,115Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            3,475
            
            
            $
            914
            
            
            $
            1,426Income
                taxes
                paid
            
            $
            6,701
            
            
            $
            17,141
            
            
            $
            12,153Supplemental
                disclosure of non-cash investing activities:Lease
                obligation/debt incurred
                in the purchase of equipment
            
            $
            76,461
            
            
            $
            2,131
            
            
            $
            2,444Note
                payable obligation
                incurred in purchase of minority shares
            
            
            ---
            
            
            $
            ---
            
            
            
            910





See
      accompanying notes to consolidated financial statements.





36
 Table
          of Contents





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Years
      ended June 30, 2007, 2006, and 2005**


**(Dollars
      in thousands, except share amounts)**





**Common**
              **Stock**
              **No.
                of Shares**
              **Outstanding**
            
            
            **Amount**
            
            
            **Additional**
              **Paid-In**
              **Capital**
            
            
            **Retained**
              **Earnings**
              **(Deficit)**
            
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **Income/(Loss)**
            
            
            **Unearned**
              **Compensation**
            
            
            **Total**
              **Stock-**
              **Holders’**
              **Equity**Balance
                at June 30, 2004
            
            
            21,935,182
            
            
            $
            724
            
            
            $
            86,186
            
            
            $
            (1,036
            )
            
            $
            (2,355
            )
            
            $
            (689
            )
            
            $
            82,830Net
                income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            12,580
            
            
            
            ---
            
            
            
            ---
            
            
            
            12,580Equity
                adjustments for foreign currency translation,
                net of
                tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            322
            
            
            
            ---
            
            
            
            322Comprehensive
                income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            12,580
            
            
            
            322
            
            
            
            ---
            
            
            
            12,902Tax
                benefits from stock
              options
            
            
            ---
            
            
            
            ---
            
            
            
            436
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            436Secondary
                stock offering
            
            
            ---
            
            
            
            ---
            
            
            
            (25
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (25
            )Restricted
                stock grants
            
            
            ---
            
            
            
            ---
            
            
            
            319
            
            
            
            ---
            
            
            
            ---
            
            
            
            (22
            )
            
            
            297Exercise
                of incentive stock  options
            
            
            678,328
            
            
            
            22
            
            
            
            2,029
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,051Balance
                at June 30, 2005
            
            
            22,613,510
            
            
            $
            746
            
            
            $
            88,945
            
            
            $
            11,544
            
            
            $
            (2,033
            )
            
            $
            (711
            )
            
            $
            98,491Net
                income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548Equity
                adjustments for foreign currency translation,
                net of
                tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (223
            )
            
            
            ---
            
            
            
            (223
            )Comprehensive
                income (loss)
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548
            
            
            
            (223
            )
            
            
            ---
            
            
            
            20,325Tax
                benefits from stock
              options
            
            
            ---
            
            
            
            ---
            
            
            
            635
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            635Secondary
                stock offering
            
            
            (172
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Restricted
                stock grants
            
            
            121,680
            
            
            
            4
            
            
            
            201
            
            
            
            ---
            
            
            
            ---
            
            
            
            711
            
            
            
            916Exercise
                of incentive stock options
            
            
            376,349
            
            
            
            13
            
            
            
            1,047
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,060Balance
                at June 30, 2006
            
            
            23,111,367
            
            
            $
            763
            
            
            $
            90,828
            
            
            $
            32,092
            
            
            $
            (2,256
            )
            
            $
            ---
            
            
            $
            121,427Net
                income
            
            
            
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253Equity
                adjustments for foreign currency translation,
                net of
                tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            871
            
            
            
            ---
            
            
            
            871Comprehensive
                income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253
            
            
            
            871
            
            
            
            ---
            
            
            
            23,124Tax
                benefits from stock
              options
            
            
            ---
            
            
            
            ---
            
            
            
            12
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            12Restricted
                stock and options expensing
            
            
            68,160
            
            
            
            2
            
            
            
            1,770
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,772Exercise
                of incentive stock options
            
            
            401,718
            
            
            
            13
            
            
            
            972
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            985Balance
                at June 30, 2007
            
            
            23,581,245
            
            
            $
            778
            
            
            $
            93,582
            
            
            $
            54,345
            
            
            $
            (1,385
            )
            
            $
            ---
            
            
            $
            147,320





See
      accompanying notes to consolidated financial statements.





37
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








**(1)**
            **ORGANIZATION
                AND SUMMARY OF SIGNIFICANT ACCOUNTING
                POLICIES**





***Organization***





Celadon
      Group, Inc. (the “Company”), through its subsidiaries, provides long haul, full
      truckload services between the United States, Canada, and Mexico. The Company’s
      primary trucking subsidiaries are: Celadon Trucking Services, Inc. (“CTSI”), a
      U.S. based company; Celadon Logistics Services, Inc. (“CLSI”), a U.S. based
      company; Servicio de Transportation Jaguar, S.A. de C.V. (“Jaguar”), a Mexican
      based company; and Celadon Canada, Inc. (“CelCan”), a Canadian based
      company.





TruckersB2B,
      Inc. (“TruckersB2B”) is an Internet based “business-to-business” membership
      program, owned by Celadon E-Commerce, Inc., a wholly owned subsidiary of Celadon
      Group, Inc.





***Summary
      of Significant Accounting Policies***





*Principles
      of Consolidation and Presentation*





The
      consolidated financial statements include the accounts of Celadon Group, Inc.
      and its wholly and majority owned subsidiaries, all of which are wholly owned
      except for Jaguar in which the Company has a 75% interest. All significant
      intercompany accounts and transactions have been eliminated in consolidation.
      Unless otherwise noted, all references to annual periods refer to the respective
      fiscal years ended June 30.





*Use
      of Estimates*





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles (“GAAP”) requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenues,
      expenses, and related disclosures at the date of the financial statements and
      during the reporting period. Such estimates include provisions for liability
      claims and uncollectible accounts receivable. Actual results could differ from
      those estimates.





*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid instruments with maturity of three months
      or
      less when purchased to be cash equivalents.





*Concentration
      of Credit Risk*





Financial
      instruments, which potentially subject the Company to concentrations of credit
      risk, consist primarily of trade receivables. The Company performs ongoing
      credit evaluations of its customers and does not require collateral for its
      accounts receivable. The Company maintains reserves which management believes
      are adequate to provide for potential credit losses. Uncollectible accounts
      receivable are written off against the reserves. Concentrations of credit risk
      with respect to trade receivables are generally limited due to the Company’s
      large number of customers and the diverse range of industries, which they
      represent. Accounts receivable balances due from any single customer did not
      total more than 10% of the Company’s gross trade receivables at June 30,
      2007.





38
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








*Property
      and Equipment*





Property
      and equipment are stated at cost. Property and equipment under capital leases
      are stated at fair value at the inception of the lease.





Depreciation
      of property and equipment and amortization of assets under capital leases is
      generally computed using the straight-line method and is based on the estimated
      useful lives of the related assets (net of salvage value) as
      follows:





Revenue
                and service equipment
            2-7
                yearsFurniture
                and office equipment
            4-5
                yearsBuildings
            20
                yearsLeasehold
                improvements
            Lesser
                of life of lease or useful life of
                improvement





Initial
      delivery costs relating to placing tractors in service are expensed as incurred.
      The cost of maintenance and repairs is charged to expense as
      incurred.





Long-lived
      assets are depreciated over estimated useful lives based on historical
      experience and prevailing industry practice. Estimated useful lives are
      periodically reviewed to ensure they remain appropriate. Long-lived assets
      are
      tested for impairment whenever an event occurs that indicates an impairment
      may
      exist. Future cash flows and operating performance are used for analyzing
      impairment losses. If the sum of expected undiscounted cash flows is less than
      the carrying value an impairment loss is recognized. The Company measures the
      impairment loss by comparing the fair value of the asset to its carrying value.
      Fair value is determined based on a discounted cash flow analysis or appraised
      or estimated market values as appropriate. Long-lived assets that are held
      for
      sale are recorded at the lower of carrying value or the fair value less costs
      to
      sell.





*Tires
      in Service*





Original
      and replacement tires on tractors and trailers are included in tires in service
      and are amortized over 18 to 36 months.





*Goodwill*





The
      consolidated balance sheets at June 30, 2007 and 2006, included goodwill of
      acquired businesses of approximately $19.1 million for both years. These amounts
      have been recorded as a result of business acquisitions accounted for under
      the
      purchase method of accounting. Prior to July 1, 2001, goodwill from each
      acquisition was generally amortized on a straight-line basis. Under Statement
      of
      Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other
      Intangible Assets,* which we adopted as of July 1, 2001, goodwill is
      tested for impairment annually (or more often, if an event or circumstance
      indicates that an impairment loss has been incurred) in lieu of amortization.
      During the fourth quarter of fiscal 2007, we completed our most recent annual
      impairment test for that fiscal year and concluded that there was no indication
      of impairment.





Tests
      for
      impairment include estimating the fair value of our reporting units. As required
      by SFAS No. 142, we compare the estimated fair value of our reporting units
      with
      their respective carrying amounts including goodwill. We define a reporting
      unit
      as an operating segment. Under SFAS No. 142, fair value refers to the amount
      for
      which the entire reporting unit could be bought or sold. Our methods for
      estimating reporting unit values include market quotations, asset and liability
      fair values, and other valuation techniques, such as discounted cash flows
      and
      multiples of earnings, revenue, or other financial measures. With the exception
      of market quotations, all of these methods involve significant estimates and
      assumptions, including estimates of future financial performance and the
      selection of appropriate discount rates and valuation
      multiples.


39
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








TruckersB2B,
      Inc. purchased 2,128,345 shares of its Common Stock into treasury for
      $2,435,175, which was accounted for using the purchase method in accordance
      with
      SFAS 141 “Business Combinations”, during fiscal 2005. See Note 3 to the
      Consolidated Financial Statements for further disclosure.





*Insurance
      Reserves*





The
      Company’s insurance program for liability, property damage, and cargo loss and
      damage, involves self-insurance with high retention levels. Under the casualty
      program, the Company is self-insured for personal injury and property damage
      claims for varying amounts depending on the date the claim was incurred. The
      Company accrues the estimated cost of the retained portion of incurred claims.
      These accruals are based on an evaluation of the nature and severity of the
      claim and estimates of future claims development based on historical trends.
      Insurance and claims expense will vary based on the frequency and severity
      of
      claims, the premium expense and self-insured retention levels.





*Revenue
      Recognition*





Trucking
      revenue and related direct cost are recognized on the date freight is delivered
      by the Company to the customer and collectibility is reasonably assured. Prior
      to commencement of shipment, the Company will negotiate an agreed upon price
      for
      services to be rendered.





TruckersB2B
      revenue is recognized at different times depending on the product or service
      purchased by the TruckersB2B member (“member”). Revenue for fuel rebates is
      recognized in the month the fuel was purchased by a member. The tire rebate
      revenue is recognized when proof-of-purchase documents are received from
      members. In most other programs, TruckersB2B receives commissions, royalties,
      or
      transaction fees based upon percentages of member purchases. TruckersB2B records
      revenue under these programs when earned and it receives the necessary
      information to calculate the revenue.





*Costs
      of Products and Services*





Cost
      of
      products and services represents the cost of the product or service purchased
      or
      used by the TruckersB2B member. Cost of products and services is recognized
      in
      the period that TruckersB2B recognizes revenue for the respective product or
      service.





*Advertising*





Advertising
      costs are expensed as incurred by the Company. Advertising expenses for fiscal
      2007, 2006, and 2005 were $1.4 million, $1.1 million, and
      $1.3 million, respectively, and are included in salaries, wages, and
      employee benefits and other operating expenses in the Consolidated Statements
      of
      Operations.





*Income
      Taxes*





Deferred
      taxes are recognized for the future tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial and income tax
      reporting, based on enacted tax laws and rates. Federal income taxes are
      provided on the portion of the income of foreign subsidiaries that is expected
      to be remitted to the United States.





*Accounting
      for Derivatives*





The
      Company had no derivative financial instruments in place in fiscal 2007, 2006,
      or 2005 to reduce exposure to fuel and currency price fluctuations. SFAS 133,
      *Accounting for Certain Derivative**s**and**Hedging
      Activities**,* requires that all derivative instruments be recorded
      on the balance sheet at their respective fair values.


40
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








*Earnings
      per Share (“EPS”)*





The
      Company applies the provisions of SFAS No. 128, “*Earnings per Share*”,
      which requires companies to present basic EPS and diluted EPS. Basic EPS
      excludes dilution and is computed by dividing income available to common
      stockholders by the weighted-average number of common shares outstanding for
      the
      period. Diluted EPS reflects the dilution that could occur if securities or
      other contracts to issue common stock were exercised or converted into common
      stock or resulted in the issuance of common stock that then shared in the
      earnings of the Company. Dilutive common stock options are included in the
      diluted EPS calculation using the treasury stock method.





*Stock-based
      Employee Compensation Plans*





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123(R), *Share-Based Payments* (“SFAS No. 123(R)”), revising SFAS No.
      123, *Accounting for Stock Based Compensation*; superseding Accounting
      Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
      Employees*and its related implementation guidance; and amending SFAS No.
      95, *Statement of Cash Flows*. SFAS No. 123(R) requires companies to
      recognize the grant date fair value of stock options and other equity-based
      compensation issued to employees in its income statement. We adopted this
      statement effective July 1, 2005. Our adoption of SFAS No. 123(R) impacted
      our
      results of operations by increasing salaries, wages, and related expenses,
      increasing additional paid-in capital, and increasing deferred income taxes.
      See
      Footnote 7 for the impact to the Company.





*Foreign
      Currency Translation*





Foreign
      financial statements are translated into U.S. dollars in accordance with SFAS
      52, *Foreign Currency Translation*. Assets and liabilities of the
      Company’s foreign operations are translated into U.S. dollars at year-end
      exchange rates. Income statement accounts are translated at the average exchange
      rate prevailing during the year. Resulting translation adjustments are included
      in other comprehensive income.




*Recent
      Accounting Pronouncements*





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Op**tion
      for Financial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159
      permits entities to choose to measure certain financial assets and liabilities
      at fair value. Unrealized gains and losses on items for which the fair value
      option has been elected are reported in earnings. SFAS 159 is effective for
      fiscal years beginning after November 15, 2007. The Company is currently
      assessing the expected impact of adopting SFAS 159 on our consolidated financial
      position and results of operations when it becomes effective.





In
      September 2006, FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
      measuring fair value in GAAP and expands disclosures about fair value
      measurements. This statement was published due to the different definitions
      of
      fair value and the limited guidance for applying those definitions in GAAP
      that
      are among the many accounting pronouncements that require fair value
      measurements. SFAS 157 defines fair value as the price that would be received
      to
      sell an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date. This statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007.
      Additionally, prospective application of this statement is required as of the
      beginning of the fiscal year in which it is initially applied. SFAS 157 is
      not
      expected to have a material impact upon our financial position, results of
      operations and cash flows.




41
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








In
      September 2006, FASB issued SFAS No.
      158, *Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and
      132(R).* This statement requires an
      employer  to  recognize the overfunded or underfunded status
      of  a  defined benefit postretirement plan (other than a
      multiemployer plan) as an  asset
      or  liability  in  its  statement of
      financial position  and  to  recognize changes
      in  that  funded  status in the year in
      which  the  changes  occur
      through  comprehensive  income of a business entity. This
      statement also requires an employer to measure the funded status of a plan
      as of
      the date of its year-end statement of financial position, with limited
      exceptions. The provisions of SFAS No. 158 are effective as of the end of the
      fiscal year ending after December 15, 2006. As of June 30, 2007, management
      believes that SFAS No. 158 will have no effect on the financial position,
      results of operations, and cash flows of the Company.





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”). FIN
      48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Our effective date of this interpretation
      is
      July 1, 2007, the first fiscal year beginning after December 15,
      2006.  We are continuing to evaluate the impact of the adoption of FIN
      48 on our consolidated financial statements.  Based on our current
      evaluation we do not expect a material impact on our financials.





**(2)           STOCK
      SPLITS**





On
      January 18, 2006, the Board of Directors approved a three-for-two stock split,
      effected in the form of a fifty percent (50%) stock dividend. The stock split
      distribution date was February 15, 2006, to stockholders of record as of the
      close of business on February 1, 2006.





On
      May 4,
      2006, the Board of Directors approved a second three-for-two stock split,
      effected in the form of a fifty percent (50%) stock dividend. The second stock
      split distribution date was June 15, 2006, to stockholders of record as of
      the
      close of business on June 1, 2006.





Unless
      otherwise indicated, all share and per share amounts have been adjusted to
      give
      retroactive effect to this stock-split.





**(3)**
            **ACQUISITIONS**





On
      June
      5, 2007, the Company acquired certain assets of Air Road Express Inc. (“Air
      Road”). Pursuant to the asset purchase agreement, our wholly-owned subsidiary,
      CTSI, acquired Air Road’s truckload business, including 53 tractors and 102
      trailers for approximately $2.9 million, of which $1.3 million was allocated
      to
      equipment held for resale and $1.6 million was allocated to property, plant,
      and
      equipment. In connection with the acquisition, we offered employment to
      approximately 80 qualified, former Air Road drivers.





On
      February 28, 2007, the Company acquired certain assets of Warrior Services
      Inc.
      d/b/a Warrior Xpress (“Warrior”). Pursuant to the asset purchase agreement, our
      wholly-owned subsidiary, CTSI, acquired Warrior’s truckload business, including
      82 tractors and 287 trailers for approximately $8.3 million, the entire amount
      of which was allocated to equipment held for resale, of which $4.0 million
      is
      remaining. In connection with the acquisition, we offered employment to
      approximately 110 qualified, former Warrior drivers.





On
      October 6, 2006, the Company acquired certain assets of Erin Truckways Ltd.,
      d/b/a Digby Truck Line, Inc. (“Digby”). Pursuant to the asset purchase
      agreement, our wholly-owned subsidiary, CTSI, acquired Digby’s truckload
      business, including approximately 270 tractors and 590 trailers for
      approximately $21.2 million, which was allocated $13.0 million to equipment
      held
      for resale, of which we have sold $8.8 million, and the remaining $8.2 million
      to tractors and trailers. In connection with the acquisition, we offered
      employment to approximately 150 qualified, former Digby drivers.





42
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








On
      January 14, 2005, the Company purchased certain assets consisting of
      approximately 370 tractors and 670 van trailers of CX Roberson, Inc.
      (“Roberson”) for approximately $22.7 million. The Company used borrowings under
      its existing credit facility to fund the transaction. The transaction did not
      include Roberson’s flatbed business and related assets. The purchase price was
      allocated to the revenue equipment based on an independent appraisal of the
      equipment.





The
      Company retained approximately 200 of the newest acquired tractors and 200
      of
      the newest acquired trailers, and disposed of the balance of the acquired
      revenue equipment. Net of proceeds of dispositions, the Company’s investment in
      the former Roberson equipment was approximately $12.5 million. Following the
      acquisition, employment was offered to approximately 320 of Roberson’s drivers,
      and over 220 of those drivers accepted employment.





In
      fiscal
      2005, TruckersB2B, Inc. purchased 2,013,276 shares of its Common Stock into
      treasury for $2,435,000. An 18-month note payable for $910,000 was issued with
      the difference settled in cash. Celadon Group, Inc. and subsidiaries own 100%
      of
      the outstanding shares of TruckersB2B, Inc. The $2,435,000 of TruckersB2B
      treasury stock was accounted for using the purchase method in accordance with
      SFAS 141 “*Business Combinations*”.





**(4)**
            **PROPERTY,
                EQUIPMENT, AND LEASES**





Property
      and equipment consists of the following (in thousands):





**2007**
            
            
            **2006**Revenue
                equipment owned
            
            $
            158,924
            
            
            $
            97,721Revenue
                equipment under capital leases
            
            
            57,510
            
            
            
            2,009Furniture
                and office equipment
            
            
            4,850
            
            
            
            4,528Land
                and buildings
            
            
            15,942
            
            
            
            14,269Service
                equipment
            
            
            1,123
            
            
            
            1,080Leasehold
                improvements
            
            
            2,550
            
            
            
            2,126$
            240,898
            
            
            $
            121,733





Included
      in accumulated depreciation was $2.0 million and $0.6 million in 2007
      and 2006, respectively, related to revenue equipment under capital leases.
      Depreciation and amortization expense relating to property and equipment owned
      and revenue equipment under capital leases, including gains (losses) on
      disposition of equipment and impairment of trailers, was $21.9 million in
      2007, $12.4 million in 2006, and $14.9 million in 2005.





**(5)**
            **LEASE
                OBLIGATIONS AND LONG-TERM
                DEBT**





*Lease
      Obligations*





The
      Company leases certain revenue and service equipment under long-term lease
      agreements, payable in monthly installments.





Equipment
      obtained under capital leases is reflected on the Company’s balance sheet as
      owned and the related leases bear interest at rates ranging from 3.7% to 5.9%
      per annum, maturing at various dates through 2013.





Assets
      held under operating leases are not recorded on the Company’s balance sheet. The
      Company leases revenue and service equipment under noncancellable operating
      leases expiring at various dates through June 2013.





The
      Company leases warehouse and office space under noncancellable operating leases
      expiring at various dates through September 2021. Certain real estate leases
      contain renewal options.





43
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








Total
      rental expense under operating leases was as follows for 2007, 2006, and 2005
      (in thousands):





**200****7**
            
            
            **200****6**
            
            
            **200****5**Revenue
                and service equipment
            
            $
            31,900
            
            
            $
            39,601
            
            
            $
            35,848Office
                facilities and terminals
            
            
            3,094
            
            
            
            2,423
            
            
            
            2,298$
            34,994
            
            
            $
            42,024
            
            
            $
            38,146





Future
      minimum lease payments relating to capital leases and to operating leases with
      initial or remaining terms in excess of one year are as follows (in
      thousands):





**Year
                ended June 30**
            
            **Capital**
              **Leases**
            
            
            **Operating**
              **Leases**2008
            
            $
            8,629
            
            
            $
            39,1482009
            
            
            8,593
            
            
            
            29,9772010
            
            
            8,542
            
            
            
            22,1062011
            
            
            16,896
            
            
            
            5,8232012
            
            
            18,871
            
            
            
            5,823Thereafter
            
            
            1,832
            
            
            
            32,265Total
                minimum lease
                payments
            
            $
            63,363
            
            
            $
            135,142Less
                amounts representing
                interest
            
            
            8,343Present
                value of net minimum lease payments
            
            $
            55,020Less
                current
                maturities
            
            
            6,228Non-current
                portion
            
            $
            48,792





The
      Company is obligated for lease residual value guarantees of $62.7 million,
      with
      $15.1 million due in the first year. The guarantees are included in the future
      minimum lease payments above. To the extent the expected value at lease
      termination date is lower than the residual value guarantee, we would accrue
      for
      the difference over the remaining lease term.





*Long-Term
      Debt*





The
      Company’s outstanding borrowings excluding capital leases set forth
      above****consist of the following at June 30 (in
      thousands):





**2007**
            
            
            **2006**Outstanding
                amounts under Credit Agreement
            
            $
            18,000
            
            
            $
            4,750Other
                borrowings
            
            
            21,622
            
            
            
            5,83339,622
            
            
            
            10,583Less
                current maturities
            
            
            10,736
            
            
            
            975Non-current
                portion
            
            $
            28,886
            
            
            $
            9,608





*Lines
      of Credit*





On
      September 26, 2005, the Company, CTSI, CLSI, and TruckersB2B entered into an
      unsecured Credit Agreement with LaSalle Bank National Association, as
      administrative agent, and LaSalle Bank National Association, Fifth Third Bank
      (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures
      on
      September 24, 2010 (the “Credit Agreement”). The Credit Agreement was used to
      refinance the Company’s then-existing credit facility and is intended to provide
      for ongoing working capital needs and general corporate purposes. Borrowings
      under the Credit Agreement are based, at the option of the Company, on a base
      rate equal to the greater of the federal funds rate plus 0.5% and the
      administrative agent’s prime rate or LIBOR plus an applicable margin between
      0.75% and 1.125% that is adjusted quarterly based on cash flow
      coverage.  The effective rate for the month of June 2007 was
      7.18%.  The Credit Agreement is guaranteed by Celadon E-Commerce,
      Inc., CelCan, and Jaguar, each of which is a subsidiary of the
      Company.


44
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








The
      Credit Agreement has a maximum revolving borrowing limit of $50.0 million,
      and
      the Company may increase the revolving borrowing limit by an additional $20.0
      million, to a total of $70.0 million. Letters of credit are limited to an
      aggregate commitment of $15.0 million and a swing line facility has a limit
      of
      $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and
      0.225% per annum based on cash flow coverage is due on the daily unused portion
      of the Credit Agreement. The Credit Agreement contains certain restrictions
      and
      covenants relating to, among other things, dividends, tangible net worth, cash
      flow, mergers, consolidations, acquisitions and dispositions, and total
      indebtedness. We were in compliance with these covenants at June 30, 2007.
      At
      June 30, 2007, $18.0 million of our credit facility was utilized as outstanding
      borrowings and $4.8 million was utilized for standby letters of
      credit.





*Other
      Borrowings*





Other
      borrowings consist primarily of mortgage debt financing and notes payable for
      equipment purchase, which are collateralized by the equipment. At June 30,
      2007,
      the interest rate charged on outstanding borrowings ranged from 5.8% to
      7.5%.





Maturities
      of long-term debt for the years ending June 30 are as follows (in
      thousands):





2007
            
            $
            10,7362008
            
            
            8,3442009
            
            
            2,1592010
            
            
            18,3392011
            
            
            44$
            39,622





**(6)**
            **EMPLOYEE
                BENEFIT PLANS**





*401(k)
      Profit Sharing Plan*





The
      Company has a 401(k) profit sharing plan, which permits U.S. employees of the
      Company to contribute up to 50% of their annual compensation, up to certain
      Internal Revenue Service limits, on a pretax basis. The contributions made
      by
      each employee are fully vested immediately and are not subject to forfeiture.
      The Company makes a discretionary matching contribution of up to 50% of the
      employee’s contribution up to 5% of their annual compensation. The aggregate
      Company contribution may not exceed 5% of the employee’s compensation. Employees
      vest in the Company’s contribution to the plan at the rate of 20% per year from
      the date of employee anniversary. Contributions made by the Company during
      2007,
      2006, and 2005 amounted to $331,000, $396,000, and $403,000,
      respectively.





**(7)**
            **STOCK
                PLANS**





On
      July
      1, 2005, the Company adopted SFAS 123(R) using the modified prospective method.
      This Statement requires all share-based payments to employees, including grants
      of employee stock options, be recognized in the financial statements based
      upon
      a grant-date fair value of an award as opposed to the intrinsic value method
      of
      accounting for stock-based employee compensation under APB No. 25, which the
      Company used for the preceding years.





In
      January 2006, shareholders approved the 2006 Omnibus Plan (“2006 Plan”) that
      provides various vehicles to compensate the Company’s key employees. The 2006
      Plan utilizes such vehicles as stock options, restricted stock grants, and
      stock
      appreciation rights (“SARs”). The 2006 Plan authorized the Company to grant
      1,687,500 shares. In fiscal 2007 the Company granted 20,000 stock options and
      68,160 restricted stock grants. In fiscal 2006 the Company granted 689,445
      stock
      options and 121,680 restricted stock grants. The Company is authorized to grant
      an additional 800,871 shares.





45
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








The
      total
      compensation cost that has been recorded for such stock-based awards was an
      expense of $1.8 million in fiscal 2007, and $5.1 million in fiscal 2006, and
      $0.6 million in fiscal 2005. The total income tax benefit recognized in the
      income statement for share-based compensation arrangements was $0.8 million
      in
      fiscal 2007.





The
      Company has granted a number of stock options under various plans. Options
      granted to employees have been granted with an exercise price equal to the
      market price on the grant date and expire on the tenth anniversary of the grant
      date. The majority of options granted to employees vest 25 percent per year,
      commencing with the first anniversary of the grant date. Options granted to
      non-employee directors have been granted with an exercise price equal to the
      market price on the grant date, vest over three years with regard to the 2006
      Plan grants and four years with respect to all other grants, commencing with
      the
      first anniversary of the grant date, and expire on the tenth anniversary of
      the
      grant date.





A
      summary
      of the activity of the Company’s stock option plans as of June 30, 2007 and
      changes during the period then ended is presented below:





**Options**
            
            **Shares**
            
            
            **Weighted-Average
                Exercise**
              **Price**
            
            
            **Weighted-Average
                Remaining Contractual Term**
            
            
            **Aggregate
                Intrinsic**
              **Value**Outstanding
                at July 1, 2005
            
            
            1,175,519
            
            
            $
            2.88
            
            
            
            ---
            
            
            
            ---Granted
            
            
            689,445
            
            
            $
            12.81
            
            
            
            ---
            
            
            
            ---Exercised
            
            
            (376,349
            )
            
            $
            2.81
            
            
            
            ---
            
            
            
            ---Forfeited
                or
                expired
            
            
            (41,905
            )
            
            $
            9.43
            
            
            
            ---
            
            
            
            ---Outstanding
                at June 30, 2006
            
            
            1,446,710
            
            
            $
            7.44
            
            
            
            5.80
            
            
            $
            21,118,912Granted
            
            
            20,000
            
            
            $
            18.84
            
            
            
            ---
            
            
            
            ---Exercised
            
            
            (401,718
            )
            
            $
            2.45
            
            
            
            ---
            
            
            
            ---Outstanding
                at June 30, 2007
            
            
            1,064,992
            
            
            $
            9.54
            
            
            
            7.06
            
            
            $
            6,879,503Exercisable
                at June 30, 2007
            
            
            549,001
            
            
            $
            6.24
            
            
            
            5.65
            
            
            $
            5,346,342





The
      total
      intrinsic value of options exercised during fiscal 2007, 2006, and 2005 was
      $5.3
      million, $4.1 million, and $4.2 million, respectively.





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions used for grants:





**2007**
            
            
            **2006**
            
            
            **2005**Weighted
                average grant date fair value
            
            $
            9.97
            
            
            $
            5.59
            
            
            $
            1.67Dividend
                yield
            
            
            0
            
            
            
            0
            
            
            
            0Expected
                volatility
            
            
            64.2
            %
            
            
            50.1
            %
            
            
            37.4
            %Risk-free
                interest rate
            
            
            4.92
            %
            
            
            4.35
            %
            
            
            3.77
            %Expected
                lives
            
            4
                years
            
            
            4
                years
            
            
            7
                years





Expected
      volatility is based upon the historical volatility of the Company’s stock. The
      risk-free rate is based upon the U.S. Treasury yield curve in effect at the
      time
      of grant. Expected lives are based upon the historical experience of the
      Company.





46
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








*Restricted
      Shares*


**Number
                of Shares**
            
            
            **Weighted
                Average Grant Date Fair Value**Unvested
                at July 1, 2005
            
            
            120,037
            
            
            $
            6.02Granted
            
            
            121,680
            
            
            $
            12.81Vested
            
            
            (38,137
            )
            
            $
            5.89Unvested
                at June 30, 2006
            
            
            203,580
            
            
            $
            10.10Granted
            
            
            68,160
            
            
            $
            16.79Vested
            
            
            (68,558
            )
            
            $
            8.96Unvested
                at June 30, 2007
            
            
            203,182
            
            
            $
            12.73





Restricted
      shares granted to employees have been granted subject to achievement of certain
      performance targets and vest 25% each year, commencing with the first
      anniversary of the grant date. The weighted average grant date share prices
      were
      $16.79, $12.81, and $8.64 in fiscal 2007, 2006, and 2005,
      respectively.





As
      of
      June 30, 2007, we had $2.3 million and $2.2 million of total unrecognized
      compensation expense related to stock options and restricted stock,
      respectively, that is expected to be recognized over the remaining weighted
      average period of approximately 2.5 years for stock options and 1.8 years for
      restricted stock.





*Stock
      Appreciation Rights*





**Number
                of Shares**
            
            
            **Weighted
                Average Grant Date Fair Value**Unvested
                at July 1, 2005
            
            
            790,312
            
            
            $
            7.15Paid
            
            
            (194,069
            )
            
            $
            5.97Forfeited
            
            
            (24,806
            )
            
            $
            7.41Unvested
                at June 30, 2006
            
            
            571,437
            
            
            $
            7.73Paid
            
            
            (7,871
            )
            
            $
            4.48Forfeited
            
            
            (309,176
            )
            
            $
            7.10Unvested
                at June 30, 2007
            
            
            254,390
            
            
            $
            8.59





Stock
      appreciation rights were granted to employees vesting on a 3 or 4 year vesting
      schedule; in addition, certain financial targets must be met for these shares
      to
      vest. The weighted average grant date share price was $7.73 and $8.61 for
      fiscal 2006 and 2005, respectively. The Company recognized a $1.9 million
      benefit and an expense of $4.1 million in fiscal 2007 and 2006, respectively,
      for vested stock appreciation rights.





During
      the first quarter of fiscal 2007, the Company gave SARs grantees the opportunity
      to enter into an alternative fixed compensation arrangement whereby the grantee
      would forfeit all rights to SARs compensation in exchange for a guaranteed
      quarterly payment for the remainder of the underlying SARs term.  This
      alternative arrangement is subject to continued service to the Company or one
      of
      its subsidiaries.  The number of forfeited SARs reported above
      reflects entry into this alternative arrangement.  These fixed
      payments will be accrued quarterly from July 1, 2006 to March 31, 2009. The
      Company offered this alternative arrangement to mitigate the volatility to
      earnings from stock price variance on the SARs.





47
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








*Stockholder
      Rights Plan*





On
      June
      28, 2000, the Company’s Board of Directors approved a Stockholder Rights Plan
      whereby, on July 31, 2000, common stock purchase rights (“Rights”) were
      distributed as a dividend at the rate of one Right for each share of the
      Company’s common stock held as of the close of business on July 20, 2000. The
      Rights will expire on July 18, 2010. Under the plan, the Rights will be
      exercisable only if triggered by a person or group’s acquisition of 15% or more
      of the Company’s common stock. Each right, other than Rights held by the
      acquiring person or group, would entitle its holder to purchase a specified
      number of the Company’s common shares for 50% of their market value at that
      time.





Following
      the acquisition of 15% or more of the Company’s common stock by a person or
      group, the Board of Directors may authorize the exchange of the Rights, in
      whole
      or in part, for shares of the Company’s common stock at an exchange ratio of one
      share for each Right, provided that at the time of such proposed exchange no
      person or group is then the beneficial owner of 50% or more of the Company’s
      common stock.





Unless
      a
      15% acquisition has occurred, the Rights may be redeemed by the Company at
      any
      time prior to the termination date of the plan.





**(8)**
            **EARNINGS
                PER SHARE**





The
      following is a reconciliation of the numerators and denominators used in
      computing earnings per share (in thousands):





**2007**
            
            
            **2006**
            
            
            **2005**Net
                income
            
            $
            22,252
            
            
            $
            20,548
            
            
            $
            12,580Basic
                earnings per share:Weighted
                - average number of
                common
              shares
                outstanding
            
            
            23,252
            
            
            
            22,828
            
            
            
            22,286Basic
                earnings per
                share
            
            $
            0.96
            
            
            $
            0.90
            
            
            $
            0.56Diluted
                earnings per share:Weighted
                - average number of
                common
              shares
                outstanding
            
            
            23,252
            
            
            
            22,828
            
            
            
            22,286Effect
                of stock options and
                other incremental shares
            
            
            446
            
            
            
            558
            
            
            
            727Weighted-average
                number of
                common shares
              outstanding
                -
                diluted
            
            
            23,698
            
            
            
            23,386
            
            
            
            23,013Diluted
                earnings per
                share
            
            $
            0.94
            
            
            $
            0.88
            
            
            $
            0.55





**(9)**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company has outstanding commitments to purchase approximately $45.2 million
      of
      revenue equipment at June 30, 2007.





Standby
      letters of credit, not reflected in the accompanying consolidated financial
      statements, aggregated approximately $4.8 million at June 30,
      2007.





The
      Company has employment and consulting agreements with various key employees
      providing for minimum combined annual compensation over the next two fiscal
      years of $717,000 in fiscal 2008, and $76,000 in fiscal 2009.





48
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








There
      are
      various claims, lawsuits, and pending actions against the Company and its
      subsidiaries in the normal course of the operation of their businesses with
      respect to cargo, auto liability, or income taxes.





On
      August
      8, 2007, the 384th District Court of the State of Texas situated in El Paso,
      Texas, rendered a judgment against CTSI, for approximately $3.4 million in
      the
      case of Martinez v. Celadon Trucking Services, Inc., which was originally filed
      on September 4, 2002. The case involves a workers’ compensation claim of a
      former employee of CTSI who suffered a back injury as a result of a traffic
      accident. CTSI and the Company believe all actions taken were proper and legal
      and contend that the proper and exclusive place for resolution of this dispute
      was before the Indiana Workers Compensation Board. While there can be no
      certainty as to the outcome, the Company believes that the ultimate resolution
      of this dispute will not have a materially adverse effect on its consolidated
      financial position or results of operations. CTSI intends to vigorously appeal
      the decision.





**(10)**
            **INCOME
                TAXES**





The
      income tax provision for operations in 2007, 2006, and 2005 consisted of the
      following (in thousands):





**2007**
            
            
            **2006**
            
            
            **2005**Current:Federal
            
            $
            3,509
            
            
            $
            9,812
            
            
            $
            8,324State
                and
                local
            
            
            1,181
            
            
            
            1,262
            
            
            
            1,364Foreign
            
            
            (773
            )
            
            
            (225
            )
            
            
            589Total
                Current
            
            
            3,917
            
            
            
            10,849
            
            
            
            10,277Deferred:Federal
            
            
            9,593
            
            
            
            1,869
            
            
            
            (561
            )State
                and
                local
            
            
            524
            
            
            
            210
            
            
            
            (197
            )Foreign
            
            
            194
            
            
            
            (62
            )
            
            
            (122
            )Total
                Deferred
            
            
            10,311
            
            
            
            2,017
            
            
            
            (880
            )Total
            
            $
            14,228
            
            
            $
            12,866
            
            
            $
            9,397





No
      benefit has been recognized for U.S. federal income taxes on undistributed
      losses of foreign subsidiaries of approximately $650,000 at June 30,
      2007.  Included in the consolidated income before income taxes is a
      loss of approximately $1.2 million from foreign operations in fiscal
      2007.





The
      Company’s income tax expense varies from the statutory federal tax rate of 35%
      applied to income before income taxes as follows (in thousands):





**2007**
            
            
            **2006**
            
            
            **2005**Computed
                “expected” income tax expense
            
            $
            12,768
            
            
            $
            11,695
            
            
            $
            7,693State
                taxes, net of federal benefit
            
            
            1,108
            
            
            
            957
            
            
            
            759Non-deductible
                expenses
            
            
            1,368
            
            
            
            922
            
            
            
            1,057Other,
                net
            
            
            (1,016
            )
            
            
            (708
            )
            
            
            (112
            )Actual
                income tax
                expense
            
            $
            14,228
            
            
            $
            12,866
            
            
            $
            9,397





49
 Table
          of Contents


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








The
      tax
      effect of temporary differences that give rise to significant portions of the
      deferred tax assets and liabilities at June 30, 2007 and 2006 consisted of
      the
      following (in thousands):





**2007**
            
            
            **2006**Deferred
                tax assets:Allowance
                for doubtful
                accounts
            
            $
            355
            
            
            $
            402Insurance
                reserves
            
            
            2,491
            
            
            
            1,907Other
            
            
            4,104
            
            
            
            3,564Total
                deferred tax
                assets
            
            $
            6,950
            
            
            $
            5,873Deferred
                tax liabilities:Property
                and
                equipment
            
            $
            (19,735
            )
            
            $
            (8,639
            )Goodwill
            
            
            (2,895
            )
            
            
            (2,407
            )Capital
                leases
            
            
            (1,498
            )
            
            
            (1,223
            )Other
            
            
            (1,133
            )
            
            
            (1,604
            )Total
                deferred tax
                liabilities
            
            $
            (25,261
            )
            
            $
            (13,873
            )Net
                current deferred tax assets
            
            $
            2,021
            
            
            $
            1,867Net
                non-current deferred tax liabilities
            
            
            (20,332
            )
            
            
            (9,867
            )Total
                net deferred tax
                liabilities
            
            $
            (18,311
            )
            
            $
            (8,000
            )





As
      of
      June 30, 2007, the Company had operating loss carry-forwards of $2.0 million
      related to CelCan.





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**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








**(11)**
            **SEGMENT
                INFORMATION AND SIGNIFICANT
                CUSTOMERS**





The
      Company operates in two segments, transportation and e-commerce. The Company
      generates revenue in the transportation segment primarily by providing truckload
      hauling services through its subsidiaries, CTSI, CLSI, Jaguar, and CelCan.
      The
      Company provides certain services over the Internet through its e-commerce
      subsidiary, TruckersB2B. The e-commerce segment generates revenue by providing
      discounted fuel, tires, and other products and services to small and
      medium-sized trucking companies. The Company evaluates the performance of its
      operating segments based on operating income.





**Fiscal
                year ended**
              **June
                30,**
              **(Dollars
                in thousands)****2007**
            
            
            **2006**
            
            
            **2005**Total
                revenuesTransportation
            
            $
            492,692
            
            
            $
            471,872
            
            
            $
            428,936E-Commerce
            
            
            10,000
            
            
            
            8,322
            
            
            
            7,827502,692
            
            
            
            480,194
            
            
            
            436,763Operating
                incomeTransportation
            
            
            38,539
            
            
            
            32,708
            
            
            
            21,846E-Commerce
            
            
            1,561
            
            
            
            1,520
            
            
            
            1,56240,100
            
            
            
            34,228
            
            
            
            23,408Depreciation
                and amortizationTransportation
            
            
            21,862
            
            
            
            12,428
            
            
            
            14,856E-Commerce
            
            
            18
            
            
            
            14
            
            
            
            1421,880
            
            
            
            12,442
            
            
            
            14,870Interest
                incomeTransportation
            
            
            (21
            )
            
            
            (153
            )
            
            
            12Interest
                expenseTransportation
            
            
            3,532
            
            
            
            888
            
            
            
            1,353E-Commerce
            
            
            ---
            
            
            
            45
            
            
            
            773,532
            
            
            
            933
            
            
            
            1,430Income
                before taxesTransportation
            
            
            34,882
            
            
            
            31,939
            
            
            
            20,492E-Commerce
            
            
            1,599
            
            
            
            1,475
            
            
            
            1,48536,481
            
            
            
            33,414
            
            
            
            21,977GoodwillTransportation
            
            
            16,702
            
            
            
            16,702
            
            
            
            16,702E-Commerce
            
            
            2,435
            
            
            
            2,435
            
            
            
            2,43519,137
            
            
            
            19,137
            
            
            
            19,137Total
                assetsTransportation
            
            
            301,286
            
            
            
            186,165
            
            
            
            157,662E-Commerce
            
            
            5,627
            
            
            
            3,901
            
            
            
            2,846306,913
            
            
            
            190,066
            
            
            
            160,508





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**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**








Information
      as to the Company’s operations by geographic area is summarized below (in
      thousands). The Company allocates total revenue based on the country of origin
      of the tractor hauling the freight.





**2007**
            
            
            **2006**
            
            
            **2005**Total
                revenue:United
                States
            
            $
            414,360
            
            
            $
            393,090
            
            
            $
            357,621Canada
            
            
            58,790
            
            
            
            59,666
            
            
            
            57,297Mexico
            
            
            29,542
            
            
            
            27,438
            
            
            
            21,845Total
            
            $
            502,692
            
            
            $
            480,194
            
            
            $
            436,763Long
                lived assets:United
                States
            
            $
            198,886
            
            
            $
            101,911
            
            
            $
            70,822Canada
            
            
            9,211
            
            
            
            4,719
            
            
            
            4,891Mexico
            
            
            9,910
            
            
            
            6,348
            
            
            
            4,797Total
            
            $
            218,007
            
            
            $
            112,978
            
            
            $
            80,510





No
      customer accounted for more than 10% of the Company’s total revenue during any
      of its three most recent fiscal years.





**(12)**
            **SELECTED
                QUARTERLY DATA (Unaudited)**





Summarized
      quarterly data for fiscal 2007 and 2006 follows (in thousands except per share
      amounts):





**Fiscal
                Year 2007****1st
                Qtr.**
            
            
            **2nd
                Qtr.**
            
            
            **3rd
                Qtr.**
            
            
            **4th
                Qtr.**Total
                revenues
            
            $
            127,728
            
            
            $
            122,870
            
            
            $
            120,400
            
            
            $
            131,694Operating
                expenses
            
            
            116,087
            
            
            
            111,893
            
            
            
            112,780
            
            
            
            121,832Operating
                income
            
            
            11,641
            
            
            
            10,977
            
            
            
            7,620
            
            
            
            9,862Other
                expense, net
            
            
            279
            
            
            
            773
            
            
            
            1,030
            
            
            
            1,538Income
                before taxes
            
            
            11,362
            
            
            
            10,204
            
            
            
            6,590
            
            
            
            8,324Income
                tax expense
            
            
            4,249
            
            
            
            4,139
            
            
            
            2,660
            
            
            
            3,180Net
                income
            
            $
            7,113
            
            
            $
            6,065
            
            
            $
            3,930
            
            
            $
            5,144Basic
                income per share
            
            $
            0.31
            
            
            $
            0.26
            
            
            $
            0.17
            
            
            $
            0.22Diluted
                income per share
            
            $
            0.30
            
            
            $
            0.26
            
            
            $
            0.17
            
            
            $
            0.22





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**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2007**











**Fiscal
                Year 2006****1st
                Qtr.**
            
            
            **2nd
                Qtr.**
            
            
            **3rd
                Qtr.**
            
            
            **4th
                Qtr.**Total
                revenues
            
            $
            117,935
            
            
            $
            120,274
            
            
            $
            115,313
            
            
            $
            126,672Operating
                expenses
            
            
            109,839
            
            
            
            112,499
            
            
            
            107,347
            
            
            
            116,281Operating
                income
            
            
            8,096
            
            
            
            7,775
            
            
            
            7,966
            
            
            
            10,391Other
                expense, net
            
            
            326
            
            
            
            121
            
            
            
            189
            
            
            
            178Income
                before taxes
            
            
            7,770
            
            
            
            7,654
            
            
            
            7,777
            
            
            
            10,213Income
                tax expense
            
            
            3,086
            
            
            
            2,855
            
            
            
            3,100
            
            
            
            3,825Net
                income
            
            $
            4,684
            
            
            $
            4,799
            
            
            $
            4,677
            
            
            $
            6,388Basic
                income per share
            
            $
            0.21
            
            
            $
            0.21
            
            
            $
            0.20
            
            
            $
            0.28Diluted
                income per share
            
            $
            0.20
            
            
            $
            0.21
            
            
            $
            0.20
            
            
            $
            0.27





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**SCHEDULE
      I**





**CELADON
      GROUP, INC.**


**VALUATION
      AND QUALIFYING ACCOUNTS**





**Years
      ended June 30, 2007, 2006, and 2005**





**Description**
            
            **Balance
                at**
              **Beginning**
              **of
                Period**
            
            
            **Charged
                to**
              **Costs
                and**
              **Expenses**
            
            
            **Deductions**
            
            
            
            **Balance
                at**
              **End
                of**
              **Period****Year
                ended June 30, 2005:**Allowance
                for doubtful accounts
            
            $
            1,282,215
            
            
            $
            736,130
            
            
            $
            522,132
            (a)
            
            $
            1,496,213Reserves
                for claims payable as self insurer
            
            $
            8,710,354
            
            
            $
            11,728,147
            
            
            $
            9,656,215
            (b)
            
            $
            10,782,285**Year
                ended June 30, 2006:**Allowance
                for doubtful accounts
            
            $
            1,496,213
            
            
            $
            786,015
            
            
            $
            1,013,303
            (a)
            
            $
            1,268,925Reserves
                for claims payable as self insurer
            
            $
            10,782,285
            
            
            $
            9,728,359
            
            
            $
            12,778,099
            (b)
            
            $
            7,732,545**Year
                ended June 30, 2007:**Allowance
                for doubtful accounts
            
            $
            1,268,925
            
            
            $
            366,099
            
            
            $
            458,693
            (a)
            
            $
            1,176,331Reserves
                for claims payable as self insurer
            
            $
            7,732,545
            
            
            $
            9,097,620
            
            
            $
            9,708,932
            (b)
            
            $
            7,121,233






(a)
            Represents
                accounts receivable write-offs.(b)
            Represents
                claims paid.





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**Item
      9.** **Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





There
      were no changes in or disagreements with accountants on accounting or financial
      disclosure within the last two fiscal years.





**Item
      9A.** **Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





We
      have
      established disclosure controls and procedures to ensure that material
      information relating to us and our consolidated subsidiaries is made known
      to
      the officers who certify our financial reports and to other members of senior
      management and the Board of Directors.





Based
      on
      their evaluation as of June 30, 2007, our principal executive officer and
      principal financial officer have concluded that our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      are effective to ensure that the information required to be disclosed by us
      in
      the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in SEC
      rules and forms.





**Management’s
      Report on Internal Control Over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Internal control over financial reporting is defined in
      Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process
      designed by, or under the supervision of, the principal executive and principal
      financial officers, and effected by the board of directors, management, and
      other personnel, to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with U.S. generally accepted accounting principles and
      includes those policies and procedures that:





·
            Pertain
                to the maintenance of records that in reasonable detail, accurately,
                and
                fairly reflect the transactions and dispositions of our
                assets;·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use, or disposition of our assets that
                could
                have a material effect on our financial
                statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      assessed the effectiveness of our internal control over financial reporting
      as
      of June 30, 2007. In making this assessment, management used the criteria set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) in *Internal Control - Integrated Framework*.





Based
      on
      its assessment, management believes that, as of June 30, 2007, our internal
      control over financial reporting is effective based on those
      criteria.





Management’s
      assessment of the effectiveness of internal control over financial reporting
      as
      of June 30, 2007, has been audited by KPMG LLP, the independent registered
      public accounting firm who also audited our consolidated financial statements.
      KPMG LLP’s attestation report on management’s assessment of the Company’s
      internal control over financial reporting appears on page 30
      herein.





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 Table
          of Contents


**Design
      and Changes in Internal Control over Financial Reporting**





The
      design, monitoring, and revision of the system of internal accounting controls
      involves, among other things, management’s judgments with respect to the
      relative cost and expected benefits of specific control measures.





There
      were no changes in our internal control over financial reporting that occurred
      during the quarter ended June 30, 2007, that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





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**PART
      III**





Certain
      information required to be set forth in Part III of this report is incorporated
      by reference to our definitive Proxy Statement which will be filed with the
      SEC
      not later than 120 days after the end of the fiscal year covered by this Annual
      Report on Form 10-K. Only those sections of the definitive Proxy Statement
      which
      specifically address the items set forth herein are incorporated by reference.
      Such incorporation does not include the Compensation Committee Report included
      in the definitive Proxy Statement.





**Item
      10.          
Directors and Executive Officers of the Registrant**





The
      information required by this Item, with the exception of the Code of Ethics
      disclosure below, is incorporated herein by reference to our definitive Proxy
      Statement to be filed in connection with the 2007 Annual Meeting of
      Stockholders**.**





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics that applies to our principal executive officer,
      principal financial officer, principal accounting officer or controller, or
      persons performing similar functions. A copy of the Code of Ethics was filed
      as
      Exhibit 14 to our Annual Report on Form 10-K for the year ended June 30,
      2003, filed with the SEC on September 19, 2003.





**Item
      11.          
Executive Compensation**





The
      information required by this Item is incorporated herein by reference to our
      definitive Proxy Statement to be filed in connection with the 2007 Annual
      Meeting of Stockholders.





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





The
      information required by this Item, is incorporated herein by reference to our
      definitive Proxy Statement to be filed in connection with the 2007 Annual
      Meeting of Stockholders. The following table provides certain information as
      of
      June 30, 2007, with respect to our compensation plans and other arrangements
      under which shares of our common stock are authorized for issuance.





**Equity
      Compensation Plan Information**





The
      following table summarizes our equity compensation plans as of June 30,
      2007:




Plan
                Category
            
            (a)
              Number
                of securities
              to
                be issued
              upon
                exercise
              of
                outstanding options,
              warrants
                and rights
            
            (b)
              Weighted-average
              price
                of
              outstanding
                options,
              warrants
                and rights
            
            (c)
              Number
                of securities
              remaining
                available
              for
                future issuanceEquity
                compensation plans
              approved
                by security holders
            
            882,410
            
            $9.54
            
            800,871Equity
                compensation plans
              not
                approved by security holders
            
            Not
                applicable
            
            Not
                applicable
            
            Not
                applicable





57
 Table
          of Contents


**Item
      13.          
Certain Relationships and Related Transactions**





The
      information required by this Item is incorporated herein by reference to our
      definitive Proxy Statement to be filed in connection with the 2007 Annual
      Meeting of Stockholders.





**Item
      14.          
Principal Accounting Fees and Services**





The
      information required by this Item is incorporated herein by reference to our
      definitive Proxy Statement to be filed in connection with the 2007 Annual
      Meeting of Stockholders.





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 Table
          of Contents


**PART
      IV**





**Item
      15.          
Exhibits, Financial Statement Schedule**





Page
                Number of
              Annual
                Report
              on
                Form 10-K**(a)           List
                of Documents filed as part of this Report****(1)           Financial
                Statements**Reports
                of Independent Registered
                Public Accounting Firm - KPMG LLP
            32,
33Consolidated
                Balance
                Sheets
            34Consolidated
                Statements of
                Operations
            35Consolidated
                Statements of Cash
                Flows
            36Consolidated
                Statements of
                Stockholders’ Equity
            37Notes
                to Consolidated Financial
                Statements
            38**(2)           Financial
                Statement Schedule**Schedule
                I - Valuation and
                Qualifying Account
            54





59
 Table
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**(b) Exhibits
      (Numbered in accordance with Item 601 of Regulation S-K).**





3.1
            Amended
                and Restated Certificate of Incorporation of the Company. (Incorporated
                by
                reference to the Company’s Quarterly Report on Form 10-Q for the quarterly
                period ending December 31, 2005, filed with the SEC on January 30,
                2006.)3.2
            Certificate
                of Designation for Series A Junior Participating Preferred Stock.
                (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report
                on Form 10-K for the fiscal year ended June 30, 2000, filed with
                the SEC
                on September 28, 2000.)3.3
            Amended
                and Restated By-laws of the Company.  (Incorporated by reference
                to Exhibit 3 to the Company’s Current Report on Form 8-K filed with the
                SEC on July 3, 2006.)4.1
            Amended
                and Restated Certificate of Incorporation of the Company. (Incorporated
                by
                reference to the Company’s Quarterly Report on Form 10-Q for the quarterly
                period ending December 31, 2005, filed with the SEC on January 30,
                2006.)4.2
            Certificate
                of Designation for Series A Junior Participating Preferred Stock.
                (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report
                on Form 10-K for the fiscal year ended June 30, 2000, filed with
                the SEC
                on September 28, 2000.)4.3
            Rights
                Agreement, dated as of July 20, 2000, between Celadon Group, Inc.
                and
                Fleet National Bank, as Rights Agent. (Incorporated by reference
                to
                Exhibit 4.1 to the Company’s Registration Statement on Form 8-A,
                filed with the SEC on July 20, 2000.)4.4
            Amended
                and Restated By-laws of the Company.  (Incorporated by reference
                to Exhibit 3 to the Company’s Current Report on Form 8-K filed with the
                SEC on July 3, 2006.)10.1
            Celadon
                Group, Inc. 1994 Stock Option Plan. (Incorporated by reference to
                Exhibit
                B to the Company’s Proxy Statement on Schedule 14A, filed with the SEC
                October 17, 1997.) *10.2
            Employment
                Contract dated January 21, 1994 between the Company and Stephen Russell.
                (Incorporated by reference to Exhibit 10.43 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-72128, filed with the
                SEC on
                November 24, 1993.) *10.3
            Amendment
                dated February 12, 1997 to Employment Contract dated January 21,
                1994
                between the Company and Stephen Russell. (Incorporated by reference
                to
                Exhibit 10.50 to the Company’s Annual Report on Form 10-K filed with the
                SEC on September 12, 1997.) *10.4
            Celadon
                Group, Inc. Non-Employee Director Stock Option Plan. (Incorporated
                by
                reference to Exhibit A to the Company’s Proxy Statement on Schedule 14A,
                filed with the SEC on October 14, 1997.) *10.5
            Amendment
                No. 2 dated August 1, 1997 to Employment Contract dated January 21,
                1994
                between the Company and Stephen Russell. (Incorporated by reference
                to
                Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q filed with
                the SEC on February 11, 1998.) *10.6
            Rights
                Agreement, dated as of July 20, 2000, between Celadon Group, Inc.
                and
                Fleet National Bank, as Rights Agent. (Incorporated by reference
                to
                Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed
                with the SEC on July 20, 2000.)10.7
            Amendment
                No. 3 dated July 26, 2000 to Employment Contract dated January 21,
                1994
                between the Company and Stephen Russell. (Incorporated by reference
                to
                Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed with the
                SEC on September 30, 2002.) *10.8
            Amendment
                No. 4 dated April 4, 2002 to Employment Contract dated January 21,
                1994
                between the Company and Stephen Russell. (Incorporated by reference
                to
                Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed with the
                SEC on September 30, 2002.) *10.9
            Separation
                Agreement dated March 3, 2000 between the Company and Paul A. Will.
                (Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report
                on Form 10-K filed with the SEC on September 30, 2002.)
                *10.10
            Amendment
                dated September 30, 2001 to Separation Agreement between the Company
                and
                Paul A. Will dated March 3, 2000. (Incorporated by reference to Exhibit
                10.22 to the Company’s Annual Report on Form 10-K filed with the SEC on
                September 30, 2002.) *10.11
            Amendment
                No. 5 dated November 20, 2002 to Employment Contract dated January
                21,
                1994 between the Company and Stephen Russell. (Incorporated by reference
                to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed with
                the SEC on September 19, 2003.) *10.12
            Credit
                Agreement dated as of September 26, 2005 among the Company, certain
                of its
                subsidiaries, LaSalle Bank National Association, and certain other
                lenders. (Incorporated by reference to Exhibit 10.1 to the Company’s
                Current Report on Form 8-K filed with the SEC on September 30,
                2005.)10.13
            Stock
                Appreciation Rights Plan effective April 4, 2002. (Incorporated by
                reference to Exhibit 10.23 to the Company’s Quarterly Report on Form
                10-K/A filed with the SEC on October 28, 2005.)
                *






60
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10.14
              Celadon
                  Group, Inc., 2006 Omnibus Incentive Plan. (Incorporated by reference
                  to
                  Appendix B to the Company’s definitive proxy statement, filed with the SEC
                  on December 19, 2005.) *10.15
              First
                  Amendment to Credit Agreement dated December 23, 2005, among the
                  Company,
                  certain of it subsidiaries, LaSalle Bank National Association,
                  and certain
                  other lenders. (Incorporated by reference to Exhibit 10.21 to the
                  Company’s Quarterly Report on Form 10-Q filed with the SEC on January 30,
                  2006.)10.16
              Celadon
                  Group, Inc. Form of Award Notice for Employees for Restricted Stock
                  Awards. (Incorporated by reference to Exhibit 10.23 to the Company’s
                  Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
                  *10.17
              Celadon
                  Group, Inc. Form of Award Notice for Stephen Russell for Restricted
                  Stock
                  Award. (Incorporated by reference to Exhibit 10.24 to the Company’s
                  Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
                  *10.18
              Celadon
                  Group, Inc. Form of Award Notice for Employees for Incentive Stock
                  Option
                  Grants. (Incorporated by reference to Exhibit 10.25 to the Company’s
                  Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
                  *10.19
              Celadon
                  Group, Inc. Form of Award Notice for Non-Employee Directors for
                  Non-Qualified Stock Option Grants. (Incorporated by reference to
                  Exhibit
                  10.26 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on
                  May 4, 2006.) *10.20
              Asset
                  Purchase Agreement dated October 6, 2006 by and among Erin Truckways,
                  Ltd.
                  d/b/a Digby Truckline, Inc., Cynthia J. Bedore, and Celadon Trucking
                  Services, Inc.  (Incorporated by reference to Exhibit 10.21 to
                  the Company’s Quarterly Report on Form 10-Q filed with the SEC on February
                  5, 2007.)14
              Celadon
                  Group, Inc. Code of Business Conduct and Ethics adopted by the
                  Company on
                  April 30, 2003. (Incorporated by reference to Exhibit 10.20 to
                  the
                  Company’s Annual Report on Form 10-K filed with the SEC on September 19,
                  2003.)21
              Subsidiaries.
                  #23.1
              Consent
                  of Independent Registered Public Accounting Firm - KPMG LLP.
                  #31.1
              Certification
                  pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
                  to
                  Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell,
                  the
                  Company’s Chief Executive Officer. #31.2
              Certification
                  pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
                  to
                  Section 302 of the Sarbanes-Oxley Act of 2002, by Paul A. Will,
                  the
                  Company’s Chief Financial Officer. #32.1
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company’s Chief
                  Executive Officer. #32.2
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002, by Paul A. Will, the Company’s Chief
                  Financial Officer. # _______________________


*
            Management
                contract or compensatory plan or arrangement.#
            Filed
                herewith.








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**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
      has duly caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized, this August 29, 2007.





**Celadon
                Group, Inc.**By:
            /s/
                Stephen RussellStephen
                Russell
              Chairman
                of the Board and
              Chief
                Executive Officer











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





Signature
            Title
            Date/s/
                Stephen Russell
            Chairman
                of the Board and
            August
                29, 2007Stephen
                Russell
            Chief
                Executive Officer
              (Principal
                Executive Officer)/s/
                Paul A. Will
            Vice
                Chairman of the Board, Chief
              Financial
                Officer, Treasurer, and
            August
                29, 2007Paul
                A. Will
            Asst.
                Secretary (Principal Financial and
              Accounting
                Officer)/s/
                Michael Miller
            Director
            August
                29, 2007Michael
                Miller/s/
                Anthony Heyworth
            Director
            August
                29, 2007Anthony
                Heyworth/s/
                Cathy Langham
            Director
            August
                29, 2007Cathy
                Langham


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