**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, 2006


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 33****rd****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.           o Yes
x No





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 of Section 15(d) of the Act. oYes
xNo





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90
      days. xYes
oNo





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form
      10-K.                                                                           
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
xNo





On
      December 30, 2005, 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 (20,546,753 shares)
      was
      approximately $262 million, based upon the reported last sale price of the
      common stock on that date, adjusted to give effect to the registrant's
      three-for-two stock splits, effected in the form of a 50% stock dividend
      distributed on February 15, 2006 and June 15, 2006. 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 29, 2006 was 23,418,648.





DOCUMENTS
      INCORPORATED BY REFERENCE


Part
      III
      of Form 10-K - Portions of Definitive Proxy Statement for the 2006 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
              13**Item
                  2.**
              Properties
              14**Item
                  3.**
              Legal
                  Proceedings
              14**Item
                  4.**
              Submission
                  of Matters to a Vote of Security Holders
              14**PART
                  II****Item
                  5.**
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              15**Item
                  6.**
              Selected
                  Financial Data
              16**Item
                  7.**
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              17**Item
                  7A.**
              Quantitative
                  and Qualitative Disclosures About Market Risk
              28**Item
                  8.**
              Financial
                  Statements and Supplementary Data
              29**Item
                  9.**
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              53**Item
                  9A.**
              Controls
                  and Procedures
              53**PART
                  III****Item
                  10.**
              Directors
                  and Executive Officers of the Registrant
              55**Item
                  11.**
              Executive
                  Compensation
              55**Item
                  12.**
              Security
                  Ownership of Certain Beneficial Owners And Management and Related
                  Stockholder Matters
              55**Item
                  13.**
              Certain
                  Relationships and Related Transactions
              56**Item
                  14.**
              Principal
                  Accounting Fees and Services
              56**PART
                  IV****Item
                  15.**
              Exhibits,
                  Financial Statement Schedules
              57**SIGNATURES**
              60**Reports
                  of Independent Registered Public Accounting Firm**
              30Consolidated
                  Balance Sheets
              33Consolidated
                  Statements of Operations
              34Consolidated
                  Statements of Cash Flows
              35Consolidated
                  Statements of Stockholders’ Equity
              36Notes
                  to Consolidated Financial Statements
              37





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          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 information in Items 1, 1A, 3, 7, 7A and
      8
      of this Form 10-K constitutes 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.




**Item1.**  **Business**





**Introduction**





We
      are
      one of North America’s twenty largest truckload carriers as measured by revenue.
      We generated $480.2 million in operating revenue during our fiscal year
      ended June 30, 2006. 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 2006 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.





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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 12 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 in August 2003 and CX Roberson in January 2005, we expanded our
      operations and service offerings within the United States and significantly
      improved our lane density, freight mix, and customer diversity. The Highway
      Express and CX Roberson acquisitions were particularly important to us, and
      we
      believe they have contributed to our recent operating improvements.





We
      also
      operate TruckersB2B, Inc., a profitable marketing business that affords volume
      purchasing power for items such as fuel, tires, and equipment to approximately
      20,000 member trucking fleets representing approximately 426,000 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 12 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 DaimlerChrysler and other 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. Automotive parts now comprise a significantly lower
                proportion of our overall freight mix than they have historically,
                having
                been replaced primarily by consumer non-durables and other retail
                products.·
            *Operating
                a modern fleet to reduce maintenance costs and improve safety and
                driver
                retention.*We
                believe that updating our tractor and trailer fleets will produce
                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 66% of all of our trailers during the last 3 years.
                These
                changes could produce significant benefits 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.


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·
            *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,
                we
                were awarded first place in fleet safety among all truckload fleets
                that
                log more than 100 million miles per year at the Truckload Carriers
                Association Annual Conference. 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. We supplement these cross-border shipments, which
                comprised over 55% of our revenue in fiscal 2006, with domestic
                freight from service-sensitive customers.·
            *Seeking
                strategic acquisitions to broaden our existing domestic
                operations.*We
                have made eight 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 Highway Express
                in
                2003 and certain assets of CX Roberson in 2005, 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
      20,000 member trucking fleets representing approximately 426,000 tractors.
      Over
      the past five years, TruckersB2B has improved to $8.3 million in revenue and
      an
      operating profit of $1.5 million in fiscal 2006, 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.





**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 mergers or to exit the
      industry.





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Transportation
      of goods by truck between the United States, Canada, and Mexico is subject
      to
      the provisions of NAFTA. 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 true
      door-to-door carriage.





Transportation
      of goods between the United States or Canada and Mexico consists of three
      components: (i) transport from the point of origin to the Mexican border,
      (ii) drayage, which is transportation across the border, and (iii)
      transportation from the border to the final destination. While the truckload
      industry is highly competitive and fragmented, we are one of a limited number
      of
      companies that is able to provide or arrange for door-to-door transport service
      between points in the United States, Canada, and Mexico. 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 us.





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 in excess of 2,300 trucking
      customers. Our premium service to these customers is enhanced by a high
      trailer-to-tractor ratio, 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, 2006, we employed 3,353 persons, of whom 2,480 were drivers, 185 were truck
      maintenance personnel, 578 were administrative personnel, and 110 were dedicated
      services personnel and TruckersB2B personnel. None of our U.S. or Canadian
      employees is represented by a union or a collective bargaining
      unit.





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 that
      we
      offer provides independent contractors the opportunity to lease-to-own a
      tractor. As of June 30, 2006, there were 351 independent contractors providing
      a
      combined 12.8% of our tractor capacity.





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**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
      2.0
      and 3.5 years, respectively, at June 30, 2006, and approximately 1.9 and 3.6
      years, respectively, at June 30, 2005. 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 560 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, 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.





**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.





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In
      January 2004, new and more restrictive hours of service regulations for drivers
      became effective. After nine months of operation under the revised
      hours-of-service regulations, citizens’ advocacy groups successfully challenged
      the regulations in court, alleging that they were developed without properly
      considering issues of driver health. Effective October 1, 2005, the rules were
      modified but did not substantially change from the existing rules. If driving
      hours are further restricted by new revisions to the hours-of-service rules,
      we
      could experience a reduction in driver miles that may adversely affect our
      business and results of operations.





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 new emissions
      control regulations. The EPA recently adopted new emissions control regulations,
      which require progressive reductions in exhaust emissions from diesel engines
      through 2007. The new regulations decrease the amount of emissions that can
      be
      released by truck engines. 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 its 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.





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.





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**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.





**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.





**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 2006, we
      are
      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 $275,000 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.





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Ongoing
      insurance requirements could constrain our borrowing capacity. At June 30,
      2006,
      our revolving line of credit had a maximum borrowing limit of $50.0 million,
      outstanding borrowings of $4.8 million, and outstanding letters of credit of
      $4.7 million. However, our borrowings may increase if we do acquisitions,
      finance more of our equipment under the revolving line of credit, and we do
      expect outstanding letters of credit to increase in the future. Outstanding
      letters of credit reduce the available borrowings under our credit agreement.
      These factors could negatively affect our liquidity should we need to increase
      our borrowings in the future.





**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.·
            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
      2006, our top 25 customers, based on revenue, accounted for approximately 37%
      of
      our revenue, and our top 10 customers, approximately 21% of our revenue. We
      do
      not expect these percentages to change materially for 2007. 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.





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**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. Our ability to attract
      and
      retain drivers could be adversely affected by increased availability of
      alternative employment opportunities and by the potential need for more drivers
      due to more restrictive driver hours-of-service requirements imposed by the
      United States Department of Transportation, or DOT, effective January 2004
      and
      modified October 2005. If we are unable to continue to attract drivers and
      contract with independent contractors, we could be required to adjust our driver
      compensation package, let trucks sit idle, or operate with fewer independent
      contractors and face difficulty meeting shipper demands, all of which could
      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 2006. 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 future changes in and
      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.





The
      DOT,
      through the Federal Motor Carrier Safety Administration Act, or FMCSA, imposes
      safety and fitness regulations on us and our drivers. New rules that limit
      driver hours-of-service were adopted effective January 4, 2004, and then
      modified effective October 1, 2005. The rules effective October 1,
      2005, did not substantially change the existing rules but are likely to create
      a
      moderate reduction in the amount of time available to drivers in longer lengths
      of haul, which could reduce equipment productivity in those lanes. The FMCSA
      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.





In
      the
      aftermath of the September 11, 2001 terrorist attacks, federal, state, and
      municipal authorities have implemented and continue to implement various
      security measures, including checkpoints and travel restrictions on large
      trucks. The Transportation Security Administration, or TSA, of the DHS has
      adopted regulations that require determination by the TSA that each driver
      who
      applies for or renews his license for carrying hazardous materials is not a
      security threat. This could reduce the pool of qualified drivers, which could
      require us to increase driver compensation, limit our fleet growth, or let
      trucks sit idle. 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.


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**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. For the past
      few
      years, we have depended on operating leases, cash from operations, and our
      line
      of credit to fund our revenue equipment. 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 $78.7 million,
      substantially all of which are not covered by trade-in or fixed residual
      agreements with the equipment supplier. We are exposed to decreases in the
      resale value of our used equipment and we have increased exposure to issues
      on
      the growing percentage of our fleet not covered by manufacturer commitments
      which could have a materially adverse effect on our results of operations.





**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, and other factors beyond our control. For example,
      our
      average price for diesel fuel was $2.48 per gallon in 2006, as compared to
      $1.91
      per gallon in 2005. 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 impose fuel surcharges on substantially all accounts, these
      arrangements do not protect us from fuel price increases 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.
      Emission standards require reductions in the sulfur content of diesel fuel
      beginning in 2006. Management expects that a 2% power loss caused by ultra-low
      sulfur diesel fuel could lead to a loss of six cents 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 eight acquisitions, including two between 2004 and 2005. 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.





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**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 for 2007 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 productivity
      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.**





Such
      laws
      and regulations deal 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 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 following key employees: Stephen Russell, our Chairman
      of the Board and Chief Executive Officer; Thomas Glaser, our President and
      Chief
      Operating Officer; and Paul Will, our Executive Vice President and Chief
      Financial Officer. Although we have employment agreements with Messrs. Russell
      and Will, t he
      loss
      of any of their services 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 can 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.





**Item
      1B.**  **Unresolved
      Staff Comments**





None.


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**Item2.**  **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)
            
            Queretero
                (Leased)Laredo,
                TX (Owned and Leased)
            
            Tijuana
                (Leased)Louisville,
                KY (Leased)Richmond,
                VA (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.




**Item3.**  **Legal
      Proceedings**





See
      discussion under “Cargo Liability, Insurance, and Legal Proceedings” in Item 1,
      and Note 10 to the consolidated financial statements, “Commitments and
      Contingencies.”




**Item4.**  **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, 2006.








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**PART
      II**


**Item5.** **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 bid
      price per share of our common stock as reported by NASDAQ.


**Fiscal
                  2005**
              
              **High**
              
              **Low**Quarter
                  ended September 30, 2004
              
              $
              8.60
              
              $
              7.09Quarter
                  ended December 31, 2004
              
              $
              10.04
              
              $
              7.69Quarter
                  ended March 31, 2005
              
              $
              10.90
              
              $
              7.71Quarter
                  ended June 30, 2005
              
              $
              8.52
              
              $
              7.02**Fiscal
                  2006**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





On
      August
      14, 2006, there were 190 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.


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**Item
      6.**  **Selected
      Financial Data**





The
      statement 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 Operations” and
      our consolidated financial statements and related notes thereto.





**2006******
            
            **2005******
            
            **2004******
            
            **2003******
            
            **2002******(in
                thousands, except per share data, operating data, and
                percentages)Statement
                of Operations Data:Freight
                revenue(1)
            
            $
            414,465
            
            $
            399,656
            
            $
            382,918
            
            $
            355,692
            
            $
            332,630Fuel
                surcharge revenue
            
            
            65,729
            
            
            37,107
            
            
            15,005
            
            
            11,413
            
            
            4,369Total
                revenue
            
            $
            480,194
            
            $
            436,763
            
            $
            397,923
            
            $
            367,105
            
            $
            336,999Operating
                expense(2)
            
            
            445,966
            
            
            413,355
            
            
            390,852
            
            
            354,371
            
            
            326,454Operating
                Income(2)
            
            
            34,228
            
            
            23,408
            
            
            7,071
            
            
            12,734
            
            
            10,545Interest
                expense, net(3)
            
            
            780
            
            
            1,418
            
            
            3,723
            
            
            6,201
            
            
            7,487Other
                expense (income)
            
            
            34
            
            
            13
            
            
            180
            
            
            (3
            )
            
            134Income
                before income taxes
            
            
            33,414
            
            
            21,977
            
            
            3,168
            
            
            6,536
            
            
            2,924Provision
                (benefit) for income taxes
            
            
            12,866
            
            
            9,397
            
            
            3,443
            
            
            2,948
            
            
            1,215Net
                income (loss)(2)(3)
            
            $
            20,548
            
            $
            12,580
            
            $
            (275
            )
            $
            3,588
            
            $
            1,709Diluted
                earnings (loss) per share(2)(3)(4)
            
            $
            0.88
            
            $
            0.55
            
            $
            (0.02
            )
            $
            0.20
            
            $
            0.10Weighted
                average diluted shares outstanding(4)
            
            
            23,386
            
            
            23,013
            
            
            17,969
            
            
            18,079
            
            
            17,444Balance
                Sheet Data (at end of period):Net
                property and equipment
            
            $
            91,267
            
            $
            57,545
            
            $
            61,801
            
            $
            76,967
            
            $
            94,978Total
                assets
            
            
            190,066
            
            
            160,508
            
            
            151,310
            
            
            162,073
            
            
            190,031Long-term
                debt, revolving lines of credit, and capital lease obligations, including
                current maturities
            
            
            12,023
            
            
            7,344
            
            
            14,494
            
            
            60,794
            
            
            97,022Stockholders’
                equity
            
            
            121,427
            
            
            98,491
            
            
            82,830
            
            
            57,252
            
            
            53,916Operating
                Data:For
                period(5):Average
                revenue per loaded mile(6)
            
            
            1.491
            
            
            1.424
            
            
            1.322
            
            
            1.266
            
            
            1.232Average
                revenue per total mile(6)
            
            $
            1.367
            
            $
            1.316
            
            $
            1.225
            
            $
            1.169
            
            $
            1.134Average
                revenue per tractor per week(6)
            
            $
            2,948
            
            $
            2,841
            
            $
            2,723
            
            $
            2,546
            
            $
            2,548Average
                length of haul
            
            
            1,004
            
            
            995
            
            
            994
            
            
            942
            
            
            950At
                end of period:Total
                tractors(7)
            
            
            2,732
            
            
            2,570
            
            
            2,531
            
            
            2,491
            
            
            2,568Average
                age of company tractors (in years)(7)
            
            
            2.0
            
            
            1.9
            
            
            2.1
            
            
            2.7
            
            
            2.3Total
                trailers(7)
            
            
            7,630
            
            
            7,468
            
            
            6,966
            
            
            7,142
            
            
            6,758Average
                age of company trailers (in years)(7)
            
            
            3.5
            
            
            3.6
            
            
            4.6
            
            
            6.1
            
            
            4.8





__________________________





(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, logistics, and airfreight operations.(6)
            Excludes
                fuel surcharges.(7)
            Total
                fleet, including equipment operated by independent contractors and
                our
                Mexican subsidiary, Jaguar.





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**Item7.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





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





For
      the
      fiscal year ended June 30, 2006, total revenue increased 9.9%, to $480.2 million
      from $436.8 million during fiscal 2005. Freight revenue, which excludes revenue
      from fuel surcharges, increased 3.6%, to $414.5 million in fiscal 2006 from
      $400.0 million in 2005. We generated net income of $20.5 million, or $0.88
      per
      diluted share, for fiscal 2006 compared with net income of $12.6 million, or
      $0.55 per diluted share, for 2005.





We
      believe the improvements in our profitability were attributable primarily to
      the
      continued execution of our operating strategy, which involves allocating our
      equipment to customers and freight that provide the most favorable returns.
      The
      most significant components of this effort were raising rates, diversifying
      customers and freight mix, and continuing to focus on asset productivity. Our
      efforts were aided by a favorable relationship between demand and trucking
      capacity. As a result, average freight revenue per loaded mile excluding fuel
      surcharge for 2006 increased $0.067 per mile to $1.491, a 4.7% increase compared
      with $1.424 for 2005. Average freight revenue per tractor per week, our main
      measure of asset productivity, improved by 3.8% to $2,948 in 2006 compared
      with
      $2,841 for 2005. These factors more than offset a significant increase in costs,
      primarily attributable to increased costs of driver compensation, revenue
      equipment, and fuel. Our operating ratio, improved to 92.9% for 2006 compared
      with 94.6% for 2005.





At
      June
      30, 2006, our total balance sheet debt was $12.0 million and our total
      stockholders’ equity was $121.4 million, for a total debt to capitalization
      ratio of 9.0%. At June 30, 2006, we had $40.5 million of available borrowing
      capacity under our revolving credit facility and $1.7 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
      also
      derive revenue from fuel surcharges, loading and unloading activities, equipment
      detention, and other accessorial services. 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.





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**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.





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. This is primarily due to industry-wide tight capacity of
      drivers. Competition for drivers has become increasingly intense, as the
      expanding economy has provided alternative jobs at the same time as increasing
      freight demand. To obtain capacity, shippers have been willing to accept
      significant rate increases. As long as freight demand continues to exceed truck
      capacity, we expect increases in driver pay by many carriers, including us,
      and
      higher freight rates.





**Revenue
      Equipment**





We
      operate 2,732 tractors and 7,630 trailers. Of our tractors at June 30, 2006,
      941
      were owned, 1,440 were acquired under operating leases, and 351 were provided
      by
      independent contractors, who own and drive their own tractors. Of our trailers
      at June 30, 2006, 1,067 were owned and 6,563 were acquired under operating
      and
      capital leases. We recognized pre-tax impairment charges of $9.8 million in
      the
      first quarter of 2004 in relation to the reduced value of our 48 foot
      trailers.





Prior
      to
      fiscal 2006, we had financed most of our new tractors under operating leases.
      Beginning in fiscal 2006, we began to purchase 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 trailer fleet is
      acquired with operating leases. These leases generally run for a period of
      seven
      years for trailers. Financing revenue equipment acquisitions with operating
      leases, rather than borrowings or capital leases, moves the interest component
      of our financing activities into “above-the-line” operating expenses on our
      statements of operations.





In
      fiscal
      2005, we changed our tractor trade cycle from a period of approximately four
      years to three years. We evaluated the decision based on maintenance costs,
      capital requirements, prices of new and used tractors, and other factors. This
      resulted in lower maintenance expense in 2006 and 2005.





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.





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**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 and decreased non-revenue miles, to overcome expected additional cost
      increases. Because a large percentage of our costs are variable, changes in
      revenue per mile affect our profitability to a greater extent than changes
      in
      miles per tractor. For fiscal 2007, 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,
      driver recruiting and retention. Our success in these areas primarily will
      affect revenue, driver-related expenses, and insurance and claims
      expense.





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**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,********2006******
            
            ******2005******
            
            ******2004******Operating
                revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Operating
                expenses:Salaries,
                wages, and employee benefits
            
            
            30.1
            
            
            30.6
            
            
            31.3Fuel
            
            
            22.8
            
            
            18.7
            
            
            13.6Operations
                and maintenance
            
            
            6.1
            
            
            7.7
            
            
            8.3Insurance
                and claims
            
            
            2.9
            
            
            3.3
            
            
            4.8Depreciation,
                amortization, and impairment charges(1)
            
            
            2.6
            
            
            3.4
            
            
            6.5Revenue
                equipment rentals
            
            
            8.2
            
            
            8.2
            
            
            7.7Purchased
                transportation
            
            
            14.6
            
            
            16.7
            
            
            19.4Cost
                of products and services sold
            
            
            1.1
            
            
            1.1
            
            
            1.2Professional
                and consulting fees
            
            
            0.6
            
            
            0.6
            
            
            0.6Communication
                and utilities
            
            
            0.9
            
            
            1.0
            
            
            1.0Operating
                taxes and licenses
            
            
            1.7
            
            
            1.9
            
            
            2.1General
                and other operating
            
            
            1.3
            
            
            1.4
            
            
            1.7Total
                operating expenses
            
            
            92.9
            
            
            94.6
            
            
            98.2Operating
                income
            
            
            7.1
            
            
            5.4
            
            
            1.8Other
                (income) expense:Interest
                expense, net
            
            
            0.1
            
            
            0.3
            
            
            0.9Other
                expense
            
            
            ---
            
            
            ---
            
            
            0.1Income
                before income taxes
            
            
            7.0
            
            
            5.1
            
            
            0.8Provision
                for income taxes
            
            
            2.7
            
            
            2.2
            
            
            0.9Net
                income (loss)
            
            
            4.3
            %
            
            2.9
            %
            
            (0.1
            )%










Freight
                revenue(2)
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Operating
                expenses:Salaries,
                wages, and employee benefits
            
            
            34.9
            
            
            33.4
            
            
            32.5Fuel(3)
            
            
            10.5
            
            
            11.1
            
            
            10.2Operations
                and maintenance
            
            
            7.1
            
            
            8.4
            
            
            8.6Insurance
                and claims
            
            
            3.3
            
            
            3.6
            
            
            4.9Depreciation,
                amortization, and impairment charges(1)
            
            
            3.0
            
            
            3.7
            
            
            6.7Revenue
                equipment rentals
            
            
            9.6
            
            
            9.0
            
            
            8.0Purchased
                transportation
            
            
            17.0
            
            
            18.3
            
            
            20.2Cost
                of products and services sold
            
            
            1.3
            
            
            1.2
            
            
            1.3Professional
                and consulting fees
            
            
            0.7
            
            
            0.7
            
            
            0.6Communication
                and utilities
            
            
            1.0
            
            
            1.1
            
            
            1.1Operating
                taxes and licenses
            
            
            2.0
            
            
            2.1
            
            
            2.1General
                and other operating
            
            
            1.3
            
            
            1.5
            
            
            2.0Total
                operating expenses
            
            
            91.7
            
            
            94.1
            
            
            98.2Operating
                income
            
            
            8.3
            
            
            5.9
            
            
            1.8Other
                (income) expense:Interest
                expense, net
            
            
            0.2
            
            
            0.4
            
            
            1.0Other
                (income) expense
            
            
            ---
            
            
            ---
            
            
            ---Income
                before income taxes
            
            
            8.1
            
            
            5.5
            
            
            0.8Provision
                for income taxes
            
            
            3.1
            
            
            2.4
            
            
            0.9Net
                income (loss)
            
            
            5.0
            %
            
            3.1
            %
            
            (0.1
            )%










(1)
            Includes
                a $9.8 million trailer impairment charge in fiscal
                2004.(2)
            Freight
                revenue is total revenue less fuel surcharges. In this table, fuel
                surcharges are eliminated from revenue and subtracted from fuel expense.
                The amounts were $65.7 million, $37.1 million, and $15.0 million
                in 2006,
                2005 and 2004, respectively.


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**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.





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 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. 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 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, 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 in future periods as income
      fluctuates.





**Fiscal
      year ended June 30, 2005, compared with fiscal year ended June 30,
      2004**





Total
      revenue increased by $38.9 million, or 9.8%, to $436.8 million for
      fiscal 2005, from $397.9 million for fiscal 2004. Freight revenue excludes
      $37.1 million and $15.0 million of fuel surcharge revenue for fiscal 2005 and
      2004, respectively.





Freight
      revenue increased by $16.8 million, or 4.4%, to $399.7 million in fiscal 2005,
      from $382.9 million for fiscal 2004. This increase was primarily attributable
      to
      a 7.7% improvement in average freight revenue per total mile, excluding fuel
      surcharge, to $1.424 from $1.322. The improvement in average revenue per total
      mile resulted primarily from better overall freight rates in fiscal 2005, 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. Revenue per tractor per week, excluding fuel surcharge, which
      is
      our primary measure of asset productivity, increased 4.3% to $2,841 in fiscal
      2005, from $2,723 for fiscal 2004, as a result of increase in average freight
      revenue per total mile.





Revenue
      for TruckersB2B was $7.8 million in fiscal 2005, compared to
      $8.1 million in fiscal 2004. The TruckersB2B revenue decrease resulted from
      a decrease in member usage of various programs, the largest being the tire
      discount programs, due to an industry wide shortage of tires.





Salaries,
      wages, and employee benefits were $133.6 million, or 33.4% of freight
      revenue, for fiscal 2005, compared to $124.5 million, or 32.5% of freight
      revenue, for fiscal 2004. The increase in the overall dollar amount primarily
      was related to a 5.8% 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 or our fleet comprised of company trucks, and an increase in
      administrative payroll related expenses.


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Fuel
      expense, net of fuel surcharge revenue of $37.1 million and $15.0 million for
      fiscal 2005 and 2004, respectively, increased to $44.4 million, or 11.1% of
      freight revenue, for fiscal 2005, compared to $39.0 million, or 10.2% of
      freight revenue, for the same period in fiscal 2004. This increase was primarily
      attributable to a 5.8% increase in company miles and an increase in average
      fuel
      prices of approximately $0.50 per gallon. In addition, fuel expense was reduced
      by a $3.1 million fuel tax refund in 2004, relating to prior years. We expect
      fuel prices may remain at relatively high levels due to low inventory and unrest
      in the Middle East. Higher fuel prices 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 $33.7 million for fiscal 2005, from
      $33.1 million for fiscal 2004. This dollar amount increase was primarily
      the result of increased expenses to repair tractors for trade-in in fiscal
      2005,
      partially offset by decreases in maintenance expense due to our fleet upgrade
      initiative and management changes in our maintenance area. As a percentage
      of
      freight revenue, operations and maintenance decreased to 8.4% for fiscal 2005,
      compared to 8.6% for fiscal 2004. The decrease was primarily the result of
      our
      fleet upgrade initiative and implementing a tractor trade cycle change from
      4
      years to 3 years in fiscal 2005, which was offset by increased expenses to
      repair tractors for trade-in. We expect our maintenance expense will continue
      to
      decrease as a percentage of freight revenue due to these
      initiatives.





Insurance
      and claims expense was $14.4 million, or 3.6% of freight revenue, for
      fiscal 2005, compared to $18.9 million, or 4.9% of freight revenue, for
      fiscal 2004. The primary reason for the decrease in insurance and claims expense
      relates to one significant accident that occurred and was accrued for the full
      self-insured retention ($2.5 million) in the fourth quarter of fiscal 2004.
      Our
      insurance expenses consist 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 $14.9 million, or 3.7% of freight revenue, in fiscal 2005 from
      $25.8 million, or 6.7% of freight revenue, for fiscal 2004. This decrease
      was primarily attributable to the pretax impairment charge of $9.8 million,
      or
      2.6% of freight revenue, in fiscal 2004 related to the disposal of all 48-foot
      trailers in addition to 53-foot trailers over nine years old. We disposed of
      approximately 1,600 1994-1989 model year trailers and replaced them with 1,300
      2004/2005 model year trailers. In addition, we have increased our use of
      operating leases to finance acquisitions or revenue equipment. 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. We expect to use available cash generated from
      operations to purchase new tractors and trailers, which will increase
      depreciation, with the remaining additions to be acquired under off-balance
      sheet operating leases.





Revenue
      equipment rentals were $35.8 million, or 9.0% of freight revenue, in fiscal
      2005, compared to $30.8 million, or 8.0% of freight revenue, for fiscal
      2004. As of June 30, 2005, we had financed 1,836 tractors and 5,583 trailers
      under operating leases, as compared to 1,709 tractors and 3,880 trailers as
      of
      June 2004. This increase was attributable to a higher proportion of our tractor
      and trailer fleet held under operating leases during the 2005 period. As we
      expect to acquire new tractors and trailers with operating leases, we expect
      revenue equipment rentals will increase going forward. However, the rate of
      increase may slow as we generate cash from operations to purchase new tractors
      and trailers.





Purchased
      transportation decreased to $73.0 million, or 18.3% of freight revenue, for
      fiscal 2005, from $77.1 million, or 20.2% of freight revenue, for fiscal
      2004. This decrease was primarily related to reduced independent contractor
      expense, as the number of our independent contractors decreased to 378
      independent contractors at June 30, 2005 from 452, at June 30, 2004. 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.


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





Net
      interest expense decreased to $1.4 million in fiscal 2005, or 0.4% of
      freight revenue, from $3.7 million, or 1.0% of freight revenue, in fiscal
      2004. The decrease was the result of reduced bank borrowings, of which we had
      none at June 30, 2005, compared to $6.0 million at June 30, 2004, and
      reduced capital lease obligations, which decreased to $2.0 million at June
      30,
      2005, from $5.3 million at June 30, 2004. The reduction in our capital lease
      obligations has resulted largely from our increased use of operating leases
      to
      make acquisitions of new revenue equipment. The reduction in bank borrowings
      and
      other debt resulted from the use of the proceeds of our secondary offering
      completed in May 2004 and from increased working capital related to our
      increased profitability in fiscal 2005.





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 5.5% of freight revenue for fiscal 2005 from
      0.8% for fiscal 2004, including the impact of the $9.8 million pretax
      impairment charge.





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 $9.4 million for fiscal 2005, from $3.4 million for
      fiscal 2004. The effective tax rate decreased as a result of the tax effect
      of
      final settlement with the Internal Revenue Service related to all of our
      consolidated federal income tax returns through fiscal year June 30, 2001,
      recorded in fiscal 2004. Due to the non-deductible effects of our driver per
      diem pay structure, our tax rate will fluctuate 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 always are considering 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, 2006, we had on order 840 tractors for delivery through 2007. These
      revenue equipment orders represent a capital commitment of approximately $71.8
      million, before considering the proceeds of equipment dispositions. In fiscal
      2006, we purchased most of our new tractors, and we acquired most of the new
      trailers under off-balance sheet operating leases. At June 30, 2006, our
      total balance sheet debt, including capital lease obligations and current
      maturities, was $12.0 million, compared to $7.3 million at June 30,
      2005, and $14.5 million at June 30, 2004. Our debt-to-capitalization
      ratio (total balance sheet debt as a percentage of total balance sheet debt
      plus
      total stockholders’ equity) was 9.0% at June 30, 2006, 6.9% at June 30,
      2005, and 14.9% at June 30, 2004.





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,
      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.





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**Cash
      Flows**





We
      generated net cash from operating activities of $30.7 million in fiscal
      2006, $28.4 million in fiscal 2005, and $32.8 million in fiscal 2004.
      The increase in net cash provided by operations in fiscal 2006 from fiscal
      2005
      is due primarily to the increase of net income offset by non-cash stock based
      compensation and change in the income taxes.





Net
      cash
      used in investing activities was $44.3 million for fiscal 2006, compared to
      $9.6 million for fiscal 2005, and $4.6 million for fiscal 2004.
      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 $95.8 million in fiscal
      2006, $27.7 million in fiscal 2005, including the value of equipment purchased
      under capital leases and excluding the assets purchased from CX Roberson, and
      $23.8 million in fiscal 2004, including the value of equipment purchased under
      capital leases and excluding the assets purchased from Highway Express. We
      generated proceeds from the sale of property and equipment of $51.4 million
      in fiscal 2006, $39.8 million in fiscal 2005 (including $7.6 million from the
      CX
      Roberson acquisition), and $22.8 million in fiscal 2004.





Net
      cash
      provided by financing activities was $4.2 million in fiscal 2006, compared
      to net cash used of $8.0 million in fiscal 2005, and $28.9 million in
      fiscal 2004. Financing activity represents bank borrowings (new borrowings,
      net
      of repayments) and payment of the principal component of capital lease
      obligations. In fiscal 2004, we received approximately $25.9 million from the
      issuance of common stock.





**Off-Balance
      Sheet Arrangements**





Operating
      leases have been an important source of financing for our revenue equipment.
      We
      lease a significant portion of our tractor and trailer fleet using operating
      leases. In connection with substantially all of our operating leases, we have
      issued residual value guarantees, which provide that if we do not purchase
      the
      leased equipment from the lessor at the end of the lease term, then we are
      liable to the lessor for an amount equal to the shortage (if any) between the
      proceeds from the sale of the equipment and an agreed value. With respect to
      a
      small portion of our equipment held under operating leases, we have obtained
      from the manufacturers residual value guarantees that meet or exceed the amount
      of our guarantee to the lessor. 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 currently believe that proceeds
      from the sale of equipment held under operating leases would exceed the amount
      of our residual obligation on all operating leases.





Over
      the
      past several years, we have 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.





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 $78.7 million at
      June 30, 2006 compared to $70.6 million at June 30, 2005. 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.


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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 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 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, 2006,
      and
      expect to remain in compliance for the foreseeable future. At June 30, 2006,
      $4.8 million of our credit facility was utilized as outstanding borrowings
      and
      $4.7 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.





**Contractual
      Obligations and Commitments**





As
      of
      June 30, 2006, 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, 2006**
              **(in
                thousands)**
              **Amounts
                Due by Period****Total**
            
            **Less
                than**
              **One
                Year**
            
            **One
                to**
              **Three**
              **Years**
            
            **Three**
              **to
                Five**
              **Years**
            
            **Over**
              **Five**
              **Years**Operating
                leases
            
            $
            116,750
            
            $
            35,456
            
            $
            39,969
            
            $
            22,925
            
            $
            18,400Lease
                residual value guarantees
            
            
            78,698
            
            
            9,181
            
            
            34,385
            
            
            9,072
            
            
            26,060Capital
                lease obligations(1)
            
            
            1,619
            
            
            576
            
            
            373
            
            
            670
            
            
            ---Long-term
                debt(1)
            
            
            11,428
            
            
            1,412
            
            
            4,222
            
            
            5,794
            
            
            ---Sub-total
            
            
            208,495
            
            
            46,625
            
            
            78,949
            
            
            38,461
            
            
            44,460Future
                purchase of revenue equipment
            
            
            71,758
            
            
            71,758
            
            
            ---
            
            
            ---
            
            
            ---Employment
                and consulting agreements(2)
            
            
            1,072
            
            
            856
            
            
            216
            
            
            ---
            
            
            ---Standby
                letters of credit
            
            
            4,725
            
            
            4,725
            
            
            ---
            
            
            ---
            
            
            ---Total
                contractual and cash obligations
            
            $
            286,050
            
            $
            123,964
            
            $
            79,165
            
            $
            38,461
            
            $
            44,460







(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.


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**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 tractors and trailers, and estimated salvage values for tractors
      and trailers generally range from 35% to 50% of the capitalized cost. Gains
      and
      losses on the disposal of revenue equipment are included in depreciation expense
      in our statements of operations.





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 16% of our tractors
      and 22% of our trailers 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.





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*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.





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
      June
      2006, the Financial Accounting Standards Board (“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.





**Item7A.**  **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.





*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, 2006, the interest rate for
      revolving borrowings under our credit facility was LIBOR plus 0.875%. At June
      30, 2006, we had $4.8 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.


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*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,
      2006 (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 $245,000. In June 2000, the FASB issued SFAS 138,
*Accounting for Certain Derivative Instruments and Certain Hedging Activity,
      an Amendment of SFAS 133* which requires that all derivative instruments be
      recorded on the balance sheet at their respective fair values. Derivatives
      that
      are not hedges must be adjusted to fair value through earnings. As of June
      30,
      2006, we had none of our currency exposure hedged. Derivative contracts had
      no
      material impact on our results of operations for the year ended June 30,
      2006.





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, 2006
      (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 $65,000.





*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. In
      accordance with SFAS 138, we adjust any derivative instruments to fair value
      through earnings on a monthly basis. As of June 30, 2006, we had none of our
      estimated fuel purchases hedged. Derivative contracts had no material impact
      on
      our results of operations for the year ended June 30, 2006.





**Item8.**  **Financial
      Statements and Supplementary Data**





The
      following statements are filed with this report:





Reports
      of Independent Registered Public Accounting Firm - KPMG LLP;


Report
      of
      Independent Registered Public Accounting Firm - Ernst & Young,
      LLP;


Consolidated
      Balance Sheets;


Consolidated
      Statements of Operations;


Consolidated
      Statements of Cash Flows;


Consolidated
      Statements of Stockholders’ Equity;


Notes
      to
      Consolidated Financial Statements.





29
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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 the accompanying Consolidated Balance Sheets of Celadon Group, Inc.
      and
      subsidiaries as of June 30, 2006 and 2005, and the related Consolidated
      Statements of Operations, Stockholders’ Equity, and Cash Flows for the years
      then ended. In connection with our audits of the Consolidated Financial
      Statements, we also have audited the Consolidated Financial Statement schedule
      as of June 30, 2006 and 2005, and for the years then ended 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, 2006 and 2005, and the results of their operations
      and their cash flows for the years then ended, 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, 2006,
      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 31, 2006, 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
      31, 2006








30
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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,
      2006, that Celadon Group, Inc. and subsidiaries maintained effective internal
      control over financial reporting as of June 30, 2006, 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,
      2006, is fairly stated, in all material respects, based on criteria established
      in *Internal Control-Integrated Framework* 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, 2006, 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, 2006 and 2005, and the related
      Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for
      the years then ended, and our report dated August 31, 2006, expressed an
      unqualified opinion on those consolidated financial statements.





/s/
      KPMG
      LLP





Indianapolis,
      Indiana


August
      31, 2006


31
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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 the accompanying consolidated statements of operations, stockholders
      equity and cash flows of Celadon Group, Inc. for the year ended June 30, 2004.
      Our audit also included the financial statement schedule listed in the Index
      at
      Item 15. These financial statements and schedule are the responsibility of
      the
      Company's management. Our responsibility is to express an opinion on these
      financial statements and schedule based on our audit.





We
      conducted our audit in accordance with auditing standards generally accepted
      in
      the 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. We were not engaged to perform an audit of the Company's
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements of Celadon Group, Inc. referred
      to above present fairly, in all material respects, the consolidated results
      of
      its operations and its cash flows for the year ended June 30, 2004, in
      conformity with accounting principles generally accepted in the United States.
      Also, in our opinion, the related financial statement schedule, when considered
      in relation to the basic financial statement taken as a whole, presents fairly
      in all material respects the information set forth therein.








/s/
      ERNST
& YOUNG LLP





Indianapolis,
      Indiana


July
      29,
      2004





32
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          OF CONTENTS





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**June
      30, 2006 and 2005**


**(Dollars
      in thousands)**





**ASSETS**
            
            **2006**
            
            **2005******Current
                assets:Cash
                and cash equivalents
            
            $
            1,674
            
            $
            11,115Trade
                receivables, net of allowance for doubtful accounts of $1,269 and
                $1,496
                in 2006 and 2005, respectively
            
            
            55,462
            
            
            55,760Prepaid
                expenses and other current assets
            
            
            10,132
            
            
            7,391Tires
                in service
            
            
            2,737
            
            
            3,308Income
                tax receivable
            
            
            5,216
            
            
            ---Deferred
                income taxes
            
            
            1,867
            
            
            2,424Total
                current assets
            
            
            77,088
            
            
            79,998Property
                and equipment
            
            
            121,733
            
            
            88,230Less
                accumulated depreciation and amortization
            
            
            30,466
            
            
            30,685Net
                property and equipment
            
            
            91,267
            
            
            57,545Tires
                in service
            
            
            1,569
            
            
            1,739Goodwill
            
            
            19,137
            
            
            19,137Other
                assets
            
            
            1,005
            
            
            2,089Total
                assets
            
            $
            190,066
            
            $
            160,508**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            4,369
            
            $
            4,465Accrued
                salaries and benefits
            
            
            16,808
            
            
            11,928Accrued
                insurance and claims
            
            
            7,048
            
            
            10,021Accrued
                fuel expense
            
            
            6,481
            
            
            6,599Other
                accrued expenses
            
            
            12,018
            
            
            11,270Current
                maturities of long-term debt
            
            
            975
            
            
            1,057Current
                maturities of capital lease obligations
            
            
            507
            
            
            788Income
                tax payable
            
            
            ---
            
            
            1,958Total
                current liabilities
            
            
            48,206
            
            
            48,086Long-term
                debt, net of current maturities
            
            
            9,608
            
            
            4,239Capital
                lease obligations, net of current maturities
            
            
            933
            
            
            1,260Deferred
                income taxes
            
            
            9,867
            
            
            8,407Minority
                interest
            
            
            25
            
            
            25Stockholders’
                equity:Preferred
                stock, $1.00 par value, authorized 179,985 shares; no shares issued
                and
                outstanding
            
            
            ---
            
            
            ---Common
                stock, $0.033 par value, authorized 40,000,000 shares; issued and
                outstanding 23,111,367 and 22,613,510 shares at June 30,
                2006 and 2005, respectively
            
            
            763
            
            
            746Additional
                paid-in capital
            
            
            90,828
            
            
            88,945Retained
                earnings
            
            
            32,092
            
            
            11,544Unearned
                compensation on restricted stock
            
            
            ---
            
            
            (711
            )Accumulated
                other comprehensive loss
            
            
            (2,256
            )
            
            (2,033
            )Total
                stockholders’ equity
            
            
            121,427
            
            
            98,491Total
                liabilities and stockholders’ equity
            
            $
            190,066
            
            $
            160,508





See
      accompanying notes to consolidated financial statements.





33
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          OF CONTENTS


**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
      ended June 30, 2006, 2005, and 2004**


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





**2006**
            
            **2005**
            
            **2004******Revenue:Freight
                revenue
            
            $
            414,465
            
            $
            399,656
            
            $
            382,918Fuel
                surcharges
            
            
            65,729
            
            
            37,107
            
            
            15,005Total
                revenue
            
            
            480,194
            
            
            436,763
            
            
            397,923Operating
                expenses:Salaries,
                wages, and employee benefits
            
            
            144,634
            
            
            133,565
            
            
            124,532Fuel
            
            
            109,253
            
            
            81,517
            
            
            54,019Operations
                and maintenance
            
            
            29,411
            
            
            33,742
            
            
            33,081Insurance
                and claims
            
            
            13,697
            
            
            14,375
            
            
            18,919Depreciation,
                amortization, and impairment charge(1)
            
            
            12,442
            
            
            14,870
            
            
            25,779Revenue
                equipment rentals
            
            
            39,601
            
            
            35,848
            
            
            30,802Purchased
                transportation
            
            
            70,305
            
            
            73,012
            
            
            77,059Cost
                of products and services sold
            
            
            5,433
            
            
            4,807
            
            
            5,022Professional
                and consulting fees
            
            
            2,698
            
            
            2,624
            
            
            2,366Communications
                and utilities
            
            
            4,148
            
            
            4,218
            
            
            4,226Operating
                taxes and licenses
            
            
            8,247
            
            
            8,507
            
            
            8,182General
                and other operating
            
            
            6,097
            
            
            6,270
            
            
            6,865Total
                operating expenses
            
            
            445,966
            
            
            413,355
            
            
            390,852Operating
                income
            
            
            34,228
            
            
            23,408
            
            
            7,071Other
                (income) expense:Interest
                income
            
            
            (153
            )
            
            (12
            )
            
            (40
            )Interest
                expense
            
            
            933
            
            
            1,430
            
            
            3,763Other
            
            
            34
            
            
            13
            
            
            180Income
                before income taxes
            
            
            33,414
            
            
            21,977
            
            
            3,168Provision
                for income taxes
            
            
            12,866
            
            
            9,397
            
            
            3,443Net
                income (loss)
            
            $
            20,548
            
            $
            12,580
            
            $
            (275
            )Earnings
                (loss) per common share:Diluted
                earnings (loss) per share(2)
            
            $
            0.88
            
            $
            0.55
            
            $
            (0.02
            )Basic
                earnings (loss) per share(2)
            
            $
            0.90
            
            $
            0.56
            
            $
            (0.02
            )Weighted
                average shares outstanding:Diluted(2)
            
            
            23,386
            
            
            23,013
            
            
            17,969Basic(2)
            
            
            22,828
            
            
            22,286
            
            
            17,969





________________________________





(1)
            Includes
                a $9.8 million trailer impairment charge in 2004.(2)
            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.





34
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          OF CONTENTS





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      ended June 30, 2006, 2005, and 2004**


**(Dollars
      in thousands)**





**2006**
            
            **2005******
            
            **2004******Cash
                flows from operating activities:Net
                income (loss)
            
            $
            20,548
            
            $
            12,580
            
            $
            (275
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            12,985
            
            
            14,027
            
            
            13,123(Gain)
                loss on sale of equipment
            
            
            (543
            )
            
            843
            
            
            2,822Impairment
                charge
            
            
            ---
            
            
            ---
            
            
            9,834Provision
                (benefit) for deferred income taxes
            
            
            2,017
            
            
            (880
            )
            
            204Provision
                for doubtful accounts
            
            
            786
            
            
            736
            
            
            2,217Stock
                based compensation expense
            
            
            5,059
            
            
            (177
            )
            
            878Changes
                in assets and liabilities:Trade
                receivables
            
            
            (488
            )
            
            (4,248
            )
            
            (7,800
            )Income
                tax recoverable
            
            
            (5,216
            )
            
            ---
            
            
            ---Tires
                in service
            
            
            741
            
            
            1,196
            
            
            678Prepaid
                expenses and other current assets
            
            
            (3,805
            )
            
            2,512
            
            
            1,067Other
                assets
            
            
            1,164
            
            
            258
            
            
            1,385Accounts
                payable and accrued expenses
            
            
            (639
            )
            
            4,266
            
            
            6,029Income
                tax payable
            
            
            (1,957
            )
            
            (2,676
            )
            
            2,642Net
                cash provided by operating activities
            
            
            30,652
            
            
            28,437
            
            
            32,804Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (95,753
            )
            
            (25,214
            )
            
            (23,837
            )Proceeds
                on sale of property and equipment
            
            
            51,417
            
            
            39,803
            
            
            22,801Purchase
                of minority shares of subsidiary
            
            
            ---
            
            
            (1,525
            )
            
            ---Purchase
                of CX Roberson and Highway Express assets, respectively
            
            
            ---
            
            
            (22,700
            )
            
            (3,594
            )Net
                cash used in investing activities
            
            
            (44,336
            )
            
            (9,636
            )
            
            (4,630
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            1,060
            
            
            2,026
            
            
            25,875Tax
                benefit from issuance of common stock
            
            
            635
            
            
            436
            
            
            247Proceeds
                of long-term debt
            
            
            4,750
            
            
            ---
            
            
            2,040Payments
                on long-term debt
            
            
            (1,354
            )
            
            (7,235
            )
            
            (32,866
            )Principal
                payments on capital lease obligations
            
            
            (848
            )
            
            (3,269
            )
            
            (24,202
            )Net
                cash provided by (used in) financing activities
            
            
            4,243
            
            
            (8,042
            )
            
            (28,906
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (9,441
            )
            
            10,759
            
            
            (732
            )Cash
                and cash equivalents at beginning of year
            
            
            11,115
            
            
            356
            
            
            1,088Cash
                and cash equivalents at end of year
            
            $
            1,674
            
            $
            11,115
            
            $
            356Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            914
            
            $
            1,426
            
            $
            3,825Income
                taxes paid
            
            $
            17,141
            
            $
            12,153
            
            $
            270Supplemental
                disclosure of non-cash flow investing activities:Lease
                obligation/debt incurred in the purchase of equipment
            
            $
            2,131
            
            $
            2,444
            
            $
            1,166Note
                payable obligation incurred in purchase of minority shares
            
            $
            ---
            
            
            910
            
            $
            ---








See
      accompanying notes to consolidated financial statements.





35
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          OF CONTENTS





**CELADON
      GROUP, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Years
      ended June 30, 2006, 2005, and 2004**


**(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)**
            
            **Treasury**
              **Stock-**
              **Common**
            
            **Unearned**
              **Compensation**
            
            **Total**
              **Stock-**
              **Holders’**
              **Equity**Balance
                at June 30, 2003
            
            
            17,310,966
            
            $
            571
            
            $
            59,778
            
            $
            (761
            )
            $
            (1,947
            )
            $
            (389
            )
            $
            ---
            
            $
            57,252Net
                loss
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (275
            )
            
            ---
            
            
            ---
            
            
            ---
            
            
            (275
            )Equity
                adjustments for foreigncurrency
                translation,
              net
                of
                tax
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (408
            )
            
            ---
            
            
            ---
            
            
            (408
            )Comprehensive
                loss
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (275
            )
            
            (408
            )
            
            ---
            
            
            ---
            
            
            (683
            )Tax
                benefits from stock options
            
            
            ---
            
            
            ---
            
            
            247
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            247Secondary
                stock offering
            
            
            4,170,375
            
            
            138
            
            
            24,920
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            25,058Restricted
                stock grants
            
            
            152,550
            
            
            5
            
            
            822
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (689
            )
            
            138Exercise
                of incentive stock
            
            
            301,291
            
            
            10
            
            
            419
            
            
            ---
            
            
            ---
            
            
            389
            
            
            ---
            
            
            818Balance
                at June 30, 2004
            
            
            21,935,182
            
            
            724
            
            
            86,186
            
            
            (1,036
            )
            
            (2,355
            )
            
            0
            
            
            (689
            )
            
            82,830Net
                income
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            12,580
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            12,580Equity
                adjustments for foreigncurrency
                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
            )
            
            0
            
            
            (711
            )
            
            98,491Net
                income
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            20,548
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            20,548Equity
                adjustments for foreigncurrency
                translation,
              net
                of
                tax
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (223
            )
            
            ---
            
            
            ---
            
            
            (223
            )Comprehensive
                income (loss)
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            20,548
            
            
            (223
            )
            
            ---
            
            
            ---
            
            
            20,325Tax
                benefits from stock options
            
            
            ---
            
            
            ---
            
            
            635
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            635Partial
                shares retired
            
            
            (172
            )
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Restricted
                stock and options expensing
            
            
            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
            )
            $
            ---
            
            $
            ---
            
            $
            121,427





See
      accompanying notes to consolidated financial statements.





36
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(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 Account 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 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,
      2006.





37
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








*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 (net of salvage value) of the related assets 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, 2006 and 2005, 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 2006,
      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.


38
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








TruckersB2B,
      Inc. has purchased 2,128,345 shares of its Common Stock into treasury for
      $2,435,175, which is 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
      2006, 2005, and 2004 were $1.1 million, $1.3 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.








39
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








*Accounting
      for Derivatives*





The
      Company had no derivative financial instruments in place in fiscal 2006 to
      reduce exposure to fuel and currency price fluctuations. SFAS 138,
*Accounting for Certain Derivative Instruments and Certain Hedging Activity,
      an Amendment of SFAS 133*, requires that all derivative instruments be
      recorded on the balance sheet at their respective fair values.





*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 current year 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.





*Reclassifications*





Certain
      reclassifications have been made to the 2005 and 2004 financial statements
      in
      order to conform to the 2006 presentation.





*Recent
      Accounting Pronouncements*





In
      June
      2006, the FASB published 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.





40
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(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
      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
      August
      2003, the Company acquired certain assets of Highway Express, Inc. (“Highway”).
      The results of operations of Highway from August 1, 2003 are included in the
      Company’s financial statements for fiscal 2004. The Company assigned values to
      the acquired assets of Highway consisting primarily of $8.6 million of
      property and equipment, $2.4 million of trade receivables, and
      $0.4 million of cash. The purchase price of approximately
      $11.4 million was paid using cash generated from operations and the
      secondary offering. Highway’s revenue for fiscal 2002 was approximately
      $27.0 million.





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 is 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):





**2006**
            
            **2005**Revenue
                equipment owned
            
            $
            97,721
            
            $
            59,480Revenue
                equipment under capital leases
            
            
            2,009
            
            
            8,190Furniture
                and office equipment
            
            
            4,528
            
            
            4,047Land
                and buildings
            
            
            14,269
            
            
            13,439Service
                equipment
            
            
            1,080
            
            
            1,011Leasehold
                improvements
            
            
            2,126
            
            
            2,063$
            121,733
            
            $
            88,230





Included
      in accumulated depreciation was $0.6 million and $3.0 million in 2006
      and 2005, 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 $12.4 million in
      2006, $14.9 million in 2005, and $25.8 million in
      2004.


41
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(5)** **LEASE
          OBLIGATIONS AND LONG-TERM DEBT AND STOCKHOLDERS’
EQUITY**





*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 bears interest at rates ranging from 4.8% to 7.5% per annum, maturing
      at various dates through 2011.





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.





Total
      rental expense under operating leases was as follows for 2006, 2005, and 2004
      (in thousands):





**2006**
            
            **2005**
            
            **2004**Revenue
                and service equipment
            
            $
            39,601
            
            $
            35,848
            
            $
            30,802Office
                facilities and terminals
            
            
            2,423
            
            
            2,298
            
            
            2,297$
            42,024
            
            $
            38,146
            
            $
            33,099





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**2007
            
            $
            576
            
            $
            44,6372008
            
            
            230
            
            
            42,8202009
            
            
            194
            
            
            31,5342010
            
            
            143
            
            
            11,9122011
            
            
            476
            
            
            20,085Thereafter
            
            
            ---
            
            
            44,460Total
                minimum lease payments
            
            $
            1,619
            
            $
            195,448Less
                amounts representing interest
            
            
            179Present
                value of net minimum lease payments
            
            $
            1,440Less
                current maturities
            
            
            507Non-current
                portion
            
            $
            933





The
      Company is obligated for lease residual value guarantees of $78.7 million,
      with
      $9.2 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):





**2006**
            
            **2005**Outstanding
                amounts under Credit Agreement
            
            $
            4,750Other
                borrowings
            
            
            5,833
            
            
            5,29610,583
            
            
            5,296Less
                current maturities
            
            
            975
            
            
            1,057Non-current
                portion
            
            $
            9,608
            
            $
            4,239


42
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








*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 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 Credit Agreement
      is
      guaranteed by Celadon E-Commerce, Inc., CelCan, and 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, 2006.
      At
      June 30, 2006, $4.8 million of our credit facility was utilized as outstanding
      borrowings and $4.7 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,
      2006,
      the interest rate charged on outstanding borrowings ranged from 6.7% to
      7.5%.





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





2007
            
            $
            9752008
            
            
            3,0742009
            
            
            7812010
            
            
            5,6652011
            
            
            88Thereafter
            
            
            ---$
            10,583





*Stockholders’
      Equity*





In
      the
      fourth quarter of fiscal 2004, we issued 1.85 million shares of our common
      stock in a public offering. The stock issuance resulted in net proceeds to
      us of
      approximately $25.1 million. We used the proceeds to repay all amounts
      outstanding under our revolving credit facility. The balance of the net proceeds
      was used to pay off debt and leases related to equipment.





43
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(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
      2006,
      2005, and 2004 amounted to $396,000, $403,000, and $374,000,
      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 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 2006 the Company granted
      689,445 stock options and 121,680 restricted stock grants. The Company is
      authorized to grant an additional 889,031 shares.





The
      compensation cost that has been charged against income was $5.1 million in
      fiscal 2006, $558,000 in fiscal 2005, and $793,000 in fiscal 2004. The total
      income tax benefit recognized in the income statement for share-based
      compensation arrangements was $1.1 million in fiscal 2006.





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, 2006 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
            
            
            $21,118,912Exercisable
                at June 30, 2006
            
            
            782,578
            
            
            $ 
                2.89
            
            
            5.27
            
            
            $14,988,233





44
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








The
      total
      intrinsic value of options exercised during fiscal 2006, 2005, and 2004 was
      $4.1
      million, $4.2 million, and $1.1 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:





**2006**
            
            **2005**
            
            **2004**Weighted
                average grant date fair value
            
            $
            12.58
            
            $
            3.75
            
            $
            3.93Dividend
                yield
            
            
            0
            
            
            0
            
            
            0Expected
                volatility
            
            
            50.1
            %
            
            37.4
            %
            
            51.7
            %Risk-free
                interest rate
            
            
            4.35
            %
            
            3.77
            %
            
            2.88
            %Expected
                lives
            
            
            4
                years
            
            
            7
                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.





*Restricted
      Shares*





**Number
                of Shares**
            
            **Weighted
                Average****Grant
                Date Fair Value**Unvested
                at July 1, 2005
            
            
            152,550
            
            $
            6.23Granted
            
            
            121,680
            
            $
            12.81Vested
            
            
            ---
            
            
            ---Forfeited
            
            
            ---
            
            
            ---Unvested
                at June 30, 2006
            
            
            274,230
            
            $
            8.96





Restricted
      shares granted to employees have been granted with a share price equal to the
      market price on the grant date and vesting at 25 percent per year, commencing
      with the first anniversary of the grant date. In addition, there are certain
      financial targets which must be met for these shares to vest. The weighted
      average grant date share prices were $12.81, $8.64, and $5.42 in fiscal
      2006, 2005, and 2004, respectively.




As
      of
      June 30, 2006, we had $3.3 million and $1.8 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 3.5 years for stock options and 2.5 years for
      restricted stock.





*Stock
      Appreciation Rights*





**Number
                of Shares**
            
            **Weighted
                Average****Grant
                Date Fair Value**Unvested
                at July 1, 2005
            
            
            790,312
            
            $
            7.15Granted
            
            
            ---
            
            
            ---Paid
            
            
            (194,069
            )
            $
            5.97Forfeited
            
            
            (24,806
            )
            $
            7.41Unvested
                at June 30, 2006
            
            
            571,437
            
            $
            7.73





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 $8.61 and $5.07 for fiscal
      2005 and 2004, respectively. In fiscal 2006 and 2005, the Company paid $1.1
      million and $618,000, respectively, for vested stock appreciation
      rights.





45
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          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








The
      following table illustrates the effect on net income and earning per share
      if we
      had applied the fair value recognition provisions of SFAS 123(R) to options
      granted under our stock option plans in the period presented. For purposes
      of
      the pro forma disclosure, the fair value of each option grant is estimated
      on
      the date of grant and amortized to expense over the options’ vesting
      periods.





**2005**
            
            **2004**Net
                income (loss) (in thousands)As
                reported
            
            $
            12,580
            
            $
            (275
            )Compensation
                expense, using fair value method, net of tax
            
            
            228
            
            
            404Pro
                forma
            
            $
            12,352
            
            $
            (679
            )Basic
                earnings per shareAs
                reported
            
            $
            0.56
            
            $
            (0.02
            )Pro
                forma
            
            $
            0.55
            
            $
            (0.04
            )Diluted
                earnings per shareAs
                reported
            
            $
            0.55
            
            $
            (0.02
            )Pro
                forma
            
            $
            0.54
            
            $
            (0.04
            )





*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.








46
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          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








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





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





******2006******
            
            ******2005******
            
            ******2004******Net
                income (loss)
            
            $
            20,548
            
            $
            12,580
            
            $
            (275
            )Basic
                earnings (loss) per share:Weighted
                - average number of common
              shares
                outstanding
            
            
            22,828
            
            
            22,286
            
            
            17,969Basic
                earnings (loss) per share
            
            $
            0.90
            
            $
            0.56
            
            $
            (0.02
            )Diluted
                earnings (loss) per share:Weighted
                - average number of common
              shares
                outstanding
            
            
            22,828
            
            
            22,286
            
            
            17,969Effect
                of stock options and other incremental shares
            
            
            558
            
            
            727
            
            
            ---Weighted-average
                number of common shares
              outstanding
                - diluted
            
            
            23,386
            
            
            23,013
            
            
            17,969Diluted
                earnings (loss) per share
            
            $
            0.88
            
            $
            0.55
            
            $
            (0.02
            )








Diluted
      loss per share for fiscal year 2004 does not include the anti-dilutive effect
      of
      1.0 million stock options and other incremental shares.





**(9)** **RELATED
          PARTY TRANSACTIONS**





In
      October 2001, the Company sold 103,850 shares of treasury stock to non-executive
      members of management. The Company granted loans totaling $449,000 to the
      non-executive management with a 5-year term. In fiscal 2006, the remaining
      balances of the loans were paid.





**(10)** **COMMITMENTS
          AND CONTINGENCIES**





The
      Company has outstanding commitments to purchase approximately $71.8 million
      of
      revenue equipment at June 30, 2006.





Standby
      letters of credit, not reflected in the accompanying consolidated financial
      statements, aggregated approximately $4.7 million at June 30,
      2006.





The
      Company has employment and consulting agreements with various key employees
      providing for minimum combined annual compensation over the next three fiscal
      years of $856,000 in fiscal 2007, $139,000 in fiscal 2008, and $77,000 in fiscal
      2009.





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.








47
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(11)** **INCOME
          TAXES**





The
      income tax provision for operations in 2006, 2005, and 2004 consisted of the
      following (in thousands):





**2006******
            
            **2005******
            
            **2004******Current:Federal
            
            $
            9,812
            
            $
            8,324
            
            $
            2,484State
                and local
            
            
            1,262
            
            
            1,364
            
            
            256Foreign
            
            
            (225
            )
            
            589
            
            
            376Total
                Current
            
            
            10,849
            
            
            10,277
            
            
            3,116Deferred:Federal
            
            
            1,869
            
            
            (561
            )
            
            730State
                and local
            
            
            210
            
            
            (197
            )
            
            75Foreign
            
            
            (62
            )
            
            (122
            )
            
            (478
            )Total
                Deferred
            
            
            2,017
            
            
            (880
            )
            
            327Total
            
            $
            12,866
            
            $
            9,397
            
            $
            3,443





No
      provision is made for U.S. federal income taxes on undistributed earnings of
      foreign subsidiaries of approximately $1.5 million at June 30, 2006, as
      management presently expects to reinvest such earnings in the Company’s
      operations in the respective foreign countries where earned. Included in the
      consolidated income before income taxes is income of approximately
      $1.2 million generated from foreign operations in fiscal 2006.





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





**2006******
            
            **2005******
            
            **2004******Computed
                “expected” income tax expense
            
            $
            11,695
            
            $
            7,693
            
            $
            1,109State
                taxes, net of federal benefit
            
            
            957
            
            
            759
            
            
            215Non-deductible
                expenses
            
            
            922
            
            
            1,057
            
            
            1,252Settlement
                of IRS audit
            
            
            ---
            
            
            ---
            
            
            993Other,
                net
            
            
            (708
            )
            
            (112
            )
            
            (126
            )Actual
                income tax expense
            
            $
            12,866
            
            $
            9,397
            
            $
            3,443





48
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








The
      tax
      effect of temporary differences that give rise to significant portions of the
      deferred tax assets and liabilities at June 30, 2006 and 2005 consisted of
      the
      following (in thousands):





**2006**
            
            **2005**Deferred
                tax assets:Allowance
                for
                doubtful accounts
            
            $
            402
            
            $
            440Insurance
                reserves
            
            
            1,907
            
            
            1,797Other
            
            
            3,564
            
            
            1,562Total
                deferred tax assets
            
            $
            5,873
            
            $
            3,799Deferred
                tax liabilities:Property
                and
                equipment
            
            $
            (8,870
            )
            $
            (6,140
            )Goodwill
            
            
            (2,176
            )
            
            (1,728
            )Capital
                leases
            
            
            (1,223
            )
            
            (1,194
            )Other
            
            
            (1,604
            )
            
            (720
            )Total
                deferred tax liabilities
            
            $
            (13,873
            )
            $
            (9,782
            )Net
                current deferred tax assets
            
            $
            1,867
            
            $
            2,424Net
                non-current deferred tax liabilities
            
            
            (9,867
            )
            
            (8,407
            )Total
                net deferred tax liabilities
            
            $
            (8,000
            )
            $
            (5,983
            )





As
      of
      June 30, 2006, the Company had no operating loss carry-forwards.





49
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          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(12)** **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 (loss).





**Fiscal
                year ended**
              **June
                30,**
              **(Dollars
                in thousands)****2006**
            
            **2005**
            
            **2004**Total
                revenuesTransportation
            
            $
            471,872
            
            $
            428,936
            
            $
            389,813E-Commerce
            
            
            8,322
            
            
            7,827
            
            
            8,110480,194
            
            
            436,763
            
            
            397,923Operating
                incomeTransportation
            
            
            32,708
            
            
            21,846
            
            
            5,558E-Commerce
            
            
            1,520
            
            
            1,562
            
            
            1,51334,228
            
            
            23,408
            
            
            7,071Depreciation
                and amortizationTransportation
            
            
            12,428
            
            
            14,856
            
            
            25,722E-Commerce
            
            
            14
            
            
            14
            
            
            5712,442
            
            
            14,870
            
            
            25,779Interest
                incomeTransportation
            
            
            (153
            )
            
            12
            
            
            40Interest
                expenseTransportation
            
            
            888
            
            
            1,353
            
            
            3,684E-Commerce
            
            
            45
            
            
            77
            
            
            79933
            
            
            1,430
            
            
            3,763Income
                before taxesTransportation
            
            
            31,939
            
            
            20,492
            
            
            1,734E-Commerce
            
            
            1,475
            
            
            1,485
            
            
            1,43433,414
            
            
            21,977
            
            
            3,168GoodwillTransportation
            
            
            16,702
            
            
            16,702
            
            
            16,702E-Commerce
            
            
            2,435
            
            
            2,435
            
            
            ---19,137
            
            
            19,137
            
            
            16,702Total
                assetsTransportation
            
            
            186,165
            
            
            157,662
            
            
            149,824E-Commerce
            
            
            3,901
            
            
            2,846
            
            
            1,486190,066
            
            
            160,508
            
            
            151,310Special
                    charges included in segment profit lossTrailer
                impairment charge (Transportation)
            
            $
            ---
            
            $
            ---
            
            $
            9,834








50
 TABLE
          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








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.





**2006**
            
            **2005**
            
            **2004**Total
                revenue:United
                States
            
            $
            393,090
            
            $
            357,621
            
            $
            322,961Canada
            
            
            59,666
            
            
            57,297
            
            
            55,580Mexico
            
            
            27,438
            
            
            21,845
            
            
            19,382Total
            
            $
            480,194
            
            $
            436,763
            
            $
            397,923Long
                lived assets:United
                States
            
            $
            101,911
            
            $
            70,822
            
            $
            55,798Canada
            
            
            4,719
            
            
            4,891
            
            
            4,698Mexico
            
            
            6,348
            
            
            4,797
            
            
            1,305Total
            
            $
            112,978
            
            $
            80,510
            
            $
            61,801





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





51
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          OF CONTENTS


**CELADON
      GROUP, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2006**








**(13)** **SELECTED
          QUARTERLY DATA (Unaudited)**





Summarized
      quarterly data for fiscal 2006 and 2005 follows (in thousands except per share
      amounts):





**Fiscal
                Year 2006****1****st****Qtr.**
            
            **2****nd****Qtr.**
            
            **3****rd****Qtr.**
            
            **4****th****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**Fiscal
                Year 2005****1****st****Qtr.**
            
            
            **2****nd****Qtr.**
            
            
            **3****rd****Qtr.**
            
            
            **4****th****Qtr.**Total
                revenues
            
            $
            104,393
            
            $
            106,871
            
            $
            108,533
            
            $
            116,967Operating
                expenses
            
            
            99,074
            
            
            101,601
            
            
            103,209
            
            
            109,471Operating
                income
            
            
            5,319
            
            
            5,270
            
            
            5,324
            
            
            7,496Other
                expense, net
            
            
            323
            
            
            366
            
            
            413
            
            
            330Income
                before taxes
            
            
            4,996
            
            
            4,904
            
            
            4,911
            
            
            7,166Income
                tax expense
            
            
            2,245
            
            
            2,130
            
            
            2,169
            
            
            2,853Net
                income
            
            $
            2,751
            
            $
            2,774
            
            $
            2,742
            
            $
            4,313Basic
                income per share
            
            $
            0.13
            
            $
            0.13
            
            $
            0.12
            
            $
            0.19Diluted
                income per share
            
            $
            0.12
            
            $
            0.12
            
            $
            0.12
            
            $
            0.19








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**SCHEDULE
      I**





**CELADON
      GROUP, INC.**


**VALUATION
      AND QUALIFYING ACCOUNTS**





**Years
      ended June 30, 2006, 2005, and 2004**





**Description**
            
            **Balance
                at**
              **Beginning**
              **of
                Period**
            
            **Charged
                to**
              **Costs
                and**
              **Expenses**
            
            **Deductions**
            
            **Balance
                at**
              **End
                of**
              **Period****Year
                ended June 30, 2004:**Allowance
                for doubtful accounts
            
            $
            1,064,758
            
            $
            959,771
            
            $
            742,314
            (a)
            $
            1,282,215Reserves
                for claims payable as self insurer
            
            $
            5,749,447
            
            $
            14,978,172
            
            $
            12,017,265
            (b)
            $
            8,710,354**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







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





**Item9.**  **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.




**Item9A.** **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, 2006, 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;


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·
            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, 2006. 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, 2006, 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, 2006, 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 31
      herein.





**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, 2006, 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 report.
      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 or the Performance Graph
      included in the definitive Proxy Statement.





**Item10.**  **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 2006 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.





**Item11.**  **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 2006 Annual
      Meeting of Stockholders.


**Item12.** **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 2006 Annual
      Meeting of Stockholders. The following table provides certain information as
      of
      June 30, 2006, 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,
      2006:








Plan
                Category
            
            (a)
              Number
                of securities
              issued
                upon exercise
              of
                outstanding options
              warrants
                and rights
            
            (b)
              Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            
            (c)
              Number
                of securities
              remaining
                available
              for
                future issuance
              under
                equity
              compensation
                plans
              (excluding
                securities
              reflected
                in column (a))Equity
                compensation plans
              approved
                by security holders
            
            
            376,349
            
            
            $7.44
            
            
            1,687,500Equity
                compensation plans
              not
                approved by security holders
            
            
            Not
                applicable
            
            
            Not
                applicable
            
            
            Not
                applicable








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**Item13.**  **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 2006 Annual
      Meeting of Stockholders.





**Item14.**  **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 2006 Annual
      Meeting of Stockholders.





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**PART
      IV**





**Item15.**  **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
            30,
31Report
                of Independent Registered Public Accounting Firm - Ernst & Young
                LLP
            32Consolidated
                Balance Sheets
            33Consolidated
                Statements of Operations
            34Consolidated
                Statements of Cash Flows
            35Consolidated
                Statements of Stockholders’ Equity
            36Notes
                to Consolidated Financial Statements
            37**(2)****Financial
                Statement Schedule**Schedule
                I - Valuation and Qualifying Account
            53





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**(3)**  **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
            By-laws.
                (Incorporated by reference to Exhibit 3.2 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-72128, filed with the
                SEC on
                November 24, 1993.)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
            By-laws.
                (Incorporated by reference to Exhibit 3.2 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-72128, filed with the
                SEC on
                November 24, 1993.)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.) *





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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
              Asset
                  Purchase Agreement dated January 14, 2005, by and among PFT Roberson,
                  Inc., CX Roberson, Inc., and Celadon Trucking Services, Inc. (Incorporated
                  by reference to Exhibit 2.1 to the Company’s report on Form 8-K filed
                  January 21, 2005.)10.13
              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.)10.14
              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.) *10.15
              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.)*10.16
              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.)10.17
              Celadon
                  Group, Inc. 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.)
                  *10.18
              Celadon
                  Group, Inc. 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.)
                  *10.19
              Celadon
                  Group, Inc. 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.)
                  *10.20
              Celadon
                  Group, Inc. 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.) *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.
                  #23.2
              Consent
                  of Independent Registered Public Accounting Firm - Ernst & Young, 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 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 September 1, 2006.





**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
              Chief
                Executive Officer
            September
                1, 2006Stephen
                Russell
            
            (Principal
                Executive Officer)/s/
                Paul A. Will
            
            Chief
                Financial Officer, Treasurer, and
            September
                1, 2006Paul
                A. Will
            
            Asst.
                Secretary (Principal Financial and Accounting Officer)/s/
                Michael Miller
            
            Director
            September
                1, 2006Michael
                Miller/s/
                Anthony Heyworth
            
            Director
            September
                1, 2006Anthony
                Heyworth/s/
                Chris Hines
            
            Director
            September
                1, 2006Chris
                Hines








60