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, 2008


OR


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


For the
transition period from _________________ to ______________





Commission
file number: 0-23192
















CELADON
GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            13-3361050(State
      or other jurisdiction of
            (I.R.S.
      EmployerIncorporation
      or organization)
            Identification
      Number)9503
      East 33rd
      StreetIndianapolis,
      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:





Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock ($0.033 par value)
            The
      NASDAQ Stock Market LLC (Global Select Market)Series
      A Junior Participating Preferred Stock Purchase Rights
            The
      NASDAQ Stock Market LLC (Global Select
Market)





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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.
            oYes
            xNoIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 of Section 15(d) of the Act.
            oYes
            xNoIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements forthe
      past 90 days.
            xYes
            oNoIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part IIIof
      this Form 10-K or any amendment to this Form 10-K.
            
            x





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                     xNon-accelerated
      filer    o(Do
      not check if a smaller reporting company)
            Smaller
      reporting company  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 31, 2007, 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 (19,914,592 shares) was
approximately $182 million, based upon the reported last sale price of the
common stock on that date. The exclusion from such amount of the market value of
shares of common stock owned by any person shall not be deemed an admission by
the registrant that such person is an affiliate of the registrant.





The
number of outstanding shares of the registrant's common stock as of the close of
business on August 28, 2008 was 21,871,660.





DOCUMENTS
INCORPORATED BY REFERENCE


Part III
of Form 10-K - Portions of Definitive Proxy Statement for the 2008 Annual
Meeting of Stockholders











CELADON GROUP, INC.


FORM
10-K





TABLE
OF CONTENTS





PagePART
      IItem
      1.
            Business
            3Item
      1A.
            Risk
      Factors
            9Item
      1B.
            Unresolved
      Staff Comments
            15Item
      2.
            Properties
            15Item
      3.
            Legal
      Proceedings
            15Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            15PART
      IIItem
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            16Item
      6.
            Selected
      Financial Data
            19Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
            20Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            31Item
      8.
            Financial
      Statements and Supplementary Data
            31Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            55Item
      9A.
            Controls
      and Procedures
            55Item
      9B.
            Other
      Information
            56PART
      IIIItem
      10.
            Directors,
      Executive Officers, and Corporate Governance
            57Item
      11.
            Executive
      Compensation
            57Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            57Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            58Item
      14.
            Principal
      Accounting Fees and Services
            58PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            59SIGNATURES
            62Report
      of Independent Registered Public Accounting Firm
            32Consolidated
      Balance Sheets
            33Consolidated
      Statements of Operations
            34Consolidated
      Statements of Cash Flows
            35Consolidated
      Statements of Stockholders' Equity
            36Notes
      to Consolidated Financial Statements
            37








2
 TABLE OF CONTENTS


PART
I





Disclosure
Regarding Forward Looking Statements





The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Certain statements contained in this Form 10-K
and those portions of the 2008 Proxy Statement incorporated by reference may be
considered forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and, as such, involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
events, performance, or achievements of the Company to be materially different
from any future results, events, performance, or achievements expressed or
implied by such forward-looking statements. Words such as "anticipates,"
"estimates," "expects," "projects," "intends," "plans," "believes," and words or
terms of similar substance used in connection with any discussion of future
operating results, financial performance, or business plans identify
forward-looking statements. All forward-looking statements reflect our
management's present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. While it is
impossible to identify all factors that may cause actual results to differ, the
risks and uncertainties that may affect the Company's business, performance, and
results of operations include the factors discussed in Item 1A of this report.
Subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-K.





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





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





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





Item 1.    
Business





Introduction





We are
one of North America's fifteen largest truckload carriers as measured by
revenue. We generated $565.9 million in operating revenue during our fiscal
year ended June 30, 2008. 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, General
Electric, International Truck & Engine, John Deere, Kohler Company, Philip
Morris, Phillips Lighting, Proctor & Gamble, 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 2008 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. Information regarding our revenue derived from foreign customers
and long-lived assets located in foreign countries is set forth in Note 13 to
the consolidated financial statements filed as part of this
report.


3
 TABLE OF CONTENTS





Our
success is dependent upon the success of our operations in Mexico and Canada,
and we are subject to risks of doing business internationally, including
fluctuations in foreign currencies, changes in the economic strength of the
countries in which we do business, difficulties in enforcing contractual
obligations and intellectual property rights, burdens of complying with a wide
variety of international and United States export and import laws, and social,
political, and economic instability. Additional risks associated with our
foreign operations, including restrictive trade policies and imposition of
duties, taxes, or government royalties by foreign governments, are present but
largely mitigated by the terms of NAFTA. Information regarding our revenue
derived from foreign external customers and long-lived assets located in foreign
countries is set forth in Note 13 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, less than truckload, and logistics. With the acquisitions of certain
assets of Highway Express, Inc. ("Highway") in August 2003, CX Roberson, Inc.
("Roberson") in January 2005, Erin Truckways Ltd., d/b/a Digby Truck Line, Inc.
("Digby") in October 2006, Warrior Services Inc. d/b/a Warrior Xpress
("Warrior") in February 2007, and Air Road Express Inc. ("Air Road") in June
2007, we expanded our operations and service offerings within the United States
and significantly improved our lane density, freight mix, and customer
diversity.





We also
operate TruckersB2B, Inc. ("Truckers B2B"), a profitable marketing business that
affords volume purchasing power for items such as fuel, tires, and equipment to
approximately 21,000 member trucking fleets representing approximately 480,000
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 13 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. We have identified as priorities: increasing our
freight rates; decreasing our reliance on automotive industry customers; raising
our service standards; rebalancing lane flows to enhance asset utilization; and
identifying and acquiring suitable acquisition candidates and successfully
integrating acquired operations. To accomplish these objectives, we have sought
to instill high levels of discipline, cooperation, and trust between our
operations and sales departments. As a part of this integrated effort, our
operations and sales departments have developed the following strategies, goals,
and objectives:





·
            Seeking high yielding freight
      from targeted industries, customers, regions, and lanes that improves our
      overall network density and diversifies our customer and freight
      mix. We believe that by focusing our sales resources on targeted
      regions and lanes with emphasis on cross-border or international moves and
      a north - south direction, we can improve our lane density and equipment
      utilization, increase our average revenue per mile, and control 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.


4
 TABLE OF CONTENTS





·
            Operating a modern fleet to
      reduce maintenance costs and improve safety and driver retention.
      We believe that updating our tractor and trailer fleets has produced
      several benefits, including lower maintenance expenses, and enhanced
      safety, driver recruitment, and retention. We have taken two important
      steps towards modernizing our fleet. First, we shortened the replacement
      cycle for our tractors from four years to three years. Second, we have
      replaced approximately 67% of all of our trailers during the last 4 years.
      These trade policies have allowed us to recognize significant benefits
      over the past few years because maintenance and tire expenses increase
      significantly for tractors beyond the third year of operation and for
      trailers beyond the seventh year of operation, as wear and tear increases
      and some warranties expire.·
            Continuing our emphasis on
      service, safety, and technology. We offer just-in-time,
      time-definite, and other premium transportation services to meet the
      expectations of our service-oriented customers. We believe that targeting
      premium service freight permits us to obtain higher rates, build
      long-term, service-based customer relationships, and avoid competition
      from railroad, intermodal, and trucking companies that compete primarily
      on the basis of price. We believe our recent safety record has been among
      the best in our industry. In March 2006, 2005, and 2003, at the Truckload
      Carriers Association Annual Conference, we were awarded first place in
      fleet safety among all truckload fleets that log more than
      100 million miles per year. We have made significant investments in
      technologies that are intended to reduce costs, afford a competitive
      advantage with service-sensitive customers, and promote economies of
      scale. Examples of these technologies are Qualcomm satellite-based
      tracking and communications systems, our proprietary CelaTrac system that
      enables customers to track shipments and access other information via the
      Internet, and document imaging.·
            Maintaining our leading
      position in cross-border truckload shipments while offering diversified,
      nationwide transportation services in the U.S. We believe our
      strategically located terminals and experience with the languages,
      cultures, and border crossing requirements of all three North American
      countries provide us with competitive advantages in the international
      trucking marketplace. As a result of these advantages, we believe we are
      the industry leader in cross-border movements between North American
      countries. These cross-border shipments, which comprised over 48% of our
      revenue in fiscal 2008, are balanced by a strong and growing business
      with domestic freight from service-sensitive customers.·
            Seeking strategic acquisitions
      to broaden our existing domestic operations. We have made eleven
      trucking company acquisitions since 1995 and continue to evaluate
      acquisition candidates. Our current acquisition strategy, as evidenced by
      our purchases of certain assets of Highway Express in 2003, CX Roberson in
      2005, Digby in October 2006, Warrior in February 2007, and Air Road in
      June 2007, is focused on broadening our domestic operations through the
      addition of carriers that improve our lane density, customer diversity,
      and service offerings.





Other
Services





TruckersB2B. Our TruckersB2B
subsidiary is a profitable marketing business that affords volume purchasing
power for items such as fuel, tires, insurance, and other products and services
to small and medium-sized trucking companies through its website,
www.truckersb2b.com. TruckersB2B provides small and medium-sized trucking
company members with the ability to cut costs and thereby compete more
effectively and profitably with the larger fleets. TruckersB2B has approximately
21,000 member trucking fleets representing approximately 480,000 tractors.
TruckersB2B has improved to $9.3 million in revenue and an operating income of
$1.4 million in fiscal 2008. 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.   In
fiscal 2008, we began to offer less than truckload services to our
customers.


5
 TABLE OF CONTENTS


Industry and
Competition





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





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





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





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





Customers





We target
large service-sensitive customers with time-definite delivery requirements
throughout the United States, Canada, and Mexico. Our customers frequently ship
in the north-south lanes (i.e., to and from locations in Mexico and locations in
the United States and Eastern Canada). The sales personnel in our offices work
to source northbound and southbound transport, in addition to other
transportation solutions. We currently service approximately 2,000 customers.
Our premium service to these customers is enhanced by the ability to provide
significant trailer capacity where needed, state-of-the-art technology,
well-maintained tractors and trailers, and 24/7 dispatch and reporting services.
The principal types of freight transported include tobacco, consumer goods,
automotive parts, various home products and fixtures, lawn tractors and assorted
equipment, light bulbs, and various parts for engines.





No
customer accounted for more than 5% of our total revenue during any of our three
most recent fiscal years.





Drivers
and Personnel





At June
30, 2008, we employed 3,874 persons, of whom 2,861 were drivers, 198 were truck
maintenance personnel, 577 were administrative personnel, and 238 were dedicated
services personnel. None of our U.S. or Canadian employees is represented by a
union or a collective bargaining unit.





6
 TABLE OF CONTENTS


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





Independent
contractors are utilized through a contract with us to supply one or more
tractors and drivers for our use. Independent contractors must pay their own
tractor expenses, fuel, maintenance, and driver costs and must meet our
specified guidelines with respect to safety. A lease-purchase program offered
through third party financing sources provides independent contractors the
opportunity to lease-to-own a tractor. As of June 30, 2008, there were 216
independent contractors providing a combined 7.4% of our tractor
capacity.





Revenue
Equipment





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





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





The
average age of our owned and leased tractors and trailers was
approximately 1.8 and 4.1 years, respectively, at June 30, 2008. 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 700 fuel stops
throughout the United States and Canada. We have negotiated discounted pricing
based on certain volume commitments with these fuel stops. We maintain
bulk-fueling facilities in Indianapolis, Laredo, and Kitchener, Ontario to
further reduce fuel costs.





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





Stock
Splits





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





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





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


7
 TABLE OF CONTENTS


Regulation





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





New rules that limit driver
hours-of-service were adoptedby the DOT, through the Federal Motor
Carrier Safety Administration ("FMCSA"),effective January 4, 2004, and then
modified effective October 1, 2005(the "2005 Rules"). On July 24, 2007, a federal appeals
court vacated portions of the 2005 Rules. Two of the key portions vacated
by the court include the expansion of the driving day from 10 hours to 11 hours,
and the"34 hour restart"requirement that drivers must have a
break of at least 34 consecutive hours during each week.The court
indicated that, in addition to other reasons, it vacated these two portions of
the 2005 Rules because FMCSA failed to provide adequate data supporting its
decision to increase the driving day and provide for the 34-hour
restart.  Following a request by FMCSA for a 12-month extension of the
vacated rules, the court, in an order filed on September 28, 2007, granted a
90-day stay of the mandate and directed that issuance of its ruling be withheld
until December 27, 2007, to allow FMCSA time to prepare its
response.  On December 17, 2007, FMCSA submitted an interim final
rule, which became effective December 27, 2007 (the "Interim
Rule").  The Interim Rule retains the 11 hour driving day and the
34-hour restart, but provides greater statistical support and analysis regarding
the increased driving time and the 34-hour restart.  We understand
that FMCSA expects to publish a final rule later in 2008.  As the
Interim Rule appears to be very similar to the one struck down by the federal
appeals court in July of 2007, advocacy groups may challenge the Interim
Rule.





On
January 23, 2008, the federal appeals court denied an advocacy group's motion to
invalidate the Interim Rule; though additional challenges to the Interim Rule
are possible.  If further challenges occur, a court's decision to
strike down the Interim Rule could have varying effects, as reducing driving
time to 10 hours daily may reduce productivity in some lanes, while eliminating
the 34-hour restart could enhance productivity in certain
instances.  On the whole, however, we believe a court's decision to
strike down the Interim Rule would decrease productivity and cause some loss of
efficiency, as drivers and shippers may need to be retrained, computer
programming may require modifications, additional drivers may need to be
employed or engaged, additional equipment may need to be acquired, and some
shipping lanes may need to be reconfigured.  We are also unable to
predict the effect of any new rules that might be proposed, but any such
proposed rules could increase costs in our industry or decrease
productivity.





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





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


8
 TABLE OF CONTENTS


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. Effective July 1, 2008, we renewed
our auto liability policy for two years, self-insuring for personal injury and
property damage claims for amounts up to $1.5 million per occurrence.
Management believes our uninsured exposure is reasonable for the transportation
industry, based on previous history.





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





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





Seasonality





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





Internet
Website





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





Item 1A.  Risk
Factors





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





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





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


9
 TABLE OF CONTENTS





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





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





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. We currently 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 2008, we
were self-insured for the first $2.5 million of each personal injury and
property damage claim and the first $100,000 of each cargo claim. Effective July
1, 2008, we renewed our auto liability policy for two years, self-insuring for
personal injury and property damage claims for amounts up to $1.5 million
per occurrence. We are also responsible for a pro rata portion of legal
expenses relating to personal injury, property damage, and cargo claims. We
maintain a workers' compensation plan and group medical plan for our employees
with a deductible amount of $1.5 million for each workers' compensation claim
and stop loss amount of $175,000 for each group medical claim. Because of our
significant self-insured retention amounts, we have significant exposure to
fluctuations in the number and severity of claims.





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





Ongoing
insurance requirements could constrain our borrowing capacity. At June 30, 2008,
our revolving line of credit had a maximum borrowing limit of $70.0 million,
outstanding borrowings of $43.1 million, and outstanding letters of credit of
$4.5 million. Our borrowings may increase if we do acquisitions or finance more
of our equipment under our revolving line of credit. Outstanding letters of
credit with certain financial institutions reduce the available borrowings under
our revolving line of credit, which could negatively affect our liquidity should
we need to increase our borrowings in the future. In addition, ongoing insurance
requirements could constrain our borrowing capacity.





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





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





·
            We
      compete with many other truckload carriers of varying sizes and, to a
      lesser extent, with less-than-truckload carriers, railroads, and other
      transportation companies, many of which have more equipment and greater
      capital resources than we do.





10
 TABLE OF CONTENTS





·
            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
2008, our top 25 customers, based on revenue, accounted for approximately 29% of
our revenue, and our top 10 customers, approximately 18% of our revenue. We do
not expect these percentages to change materially for 2009. Generally, we do not
have long term contractual relationships with our major customers, and we cannot
assure you that our customers will continue to use our services or that they
will continue at the same levels. For some of our customers, we have entered
into multi-year contracts and we cannot be assured that the rates will remain
advantageous. A reduction in or termination of our services by one or more of
our major customers could have a materially adverse effect on our business and
operating results.





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





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





11
 TABLE OF CONTENTS


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 2008. There can be no
assurance that our revenue growth rate will continue at historical levels or
that we can effectively adapt our management, administrative, and operational
systems to respond to any future growth. We can provide no assurance that our
operating margins will not be adversely affected by expansion of our business or
by changes in economic conditions. Slower or less profitable growth could
adversely affect our stock price.





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





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





The DOT,
through the FMCSA, imposes safety and fitness regulations on us and our
drivers.  On July 24, 2007, a federal appeals court vacated portions
of the existing rules relating to drivers' hours of service. Two of the key
portions that were vacated include the expansion of the driving day from 10
hours to 11 hours, and the "34 hour restart" requirement that drivers must have
a break of at least 34 consecutive hours during each week. Following a request
by FMCSA for a 12-month extension of the vacated rules, the court, in an order
filed on September 28, 2007, granted a 90-day stay of the mandate and directed
that issuance of the its ruling be withheld until December 27, 2007, to allow
FMSCA time to prepare its response.  On December 17, 2007, FMCSA
submitted the Interim Rule, which became effective December 27,
2007.  The Interim Rule retains the 11 hour driving day and the
34-hour restart, but provides greater statistical support and analysis regarding
the increased driving time and the 34-hour restart.  We understand
that FMCSA expects to publish a final rule later in 2008.  As the
Interim Rule appears to be very similar to the one struck down by the federal
appeals court in July of 2007, advocacy groups may challenge the Interim
Rule.  On January 23,
2008, the federal appeals court denied an advocacy group's motion to invalidate
the Interim Rule; though additional challenges to the Interim Rule are
possible.  If further challenges occur, a court's decision to strike
down the Interim Rule could have varying effects,as reducing driving
time to 10 hours daily may reduce productivity in some lanes, while eliminating
the 34-hour restart could enhance productivity in certain
instances.  On the whole, however, we believe a court's decision to
strike down the Interim Rule would decrease productivity and cause some loss of
efficiency, as drivers and shippers may need to be retrained, computer
programming may require modifications, additional drivers may need to be
employed or engaged, additional equipment may need to be acquired, and some
shipping lanes may need to be reconfigured.  We are also unable to
predict the effect of any new rules that might be proposed, but any such
proposed rules could increase costs in our industry or decrease
productivity.





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





On
December 26, 2007 the FMCSA published a Notice of Proposed Rulemaking ("NPRM")
in the Federal Register regarding minimum requirements for entry level driver
training.  Under the proposed rule, an applicant for a commercial
driver's license ("CDL") would be required to present a valid driver training
certificate obtained from an accredited institution or
program.  Entry-level drivers applying for a Class A CDL would be
required to complete a minimum of 120 hours of training, consisting of 76
classroom hours and 44 driving hours.  The current regulations do not
require a minimum number of training hours and require only classroom
education.  Drivers who obtain their first CDL during the three-year
period after the FMCSA issues a final rule would be exempt.  Comments
on the NPRM were to be received by March 25, 2008, but were extended to May 23,
2008.  If the NPRM is approved as written, this rule could materially
impact the number of potential new drivers entering the industry and,
accordingly negatively impact our results of operations.


12
 TABLE OF CONTENTS





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





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





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





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





We
currently have lease residual value guarantees of approximately $67.1 million,
substantially all of which are not covered by trade-in or fixed residual
agreements with the equipment suppliers. We are exposed to decreases in the
resale value of our used equipment and we have increased exposure to issues on
the significant percentage of our fleet not covered by manufacturer commitments
which could have a materially adverse effect on our results of
operations.





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





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





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





We have
made eleven acquisitions since 1995. 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.





13
 TABLE OF CONTENTS


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.





If we cannot effectively manage the
challenges associated with doing business internationally, our revenues and
profitability may suffer.





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.





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





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





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





In
addition to direct regulation by the DOT and other agencies, we are subject to
various environmental laws and regulations dealing with the hauling and handling
of hazardous materials, fuel storage tanks, air emissions from our vehicles and
facilities, and discharge and retention of storm water. We operate in industrial
areas, where truck terminals and other industrial activities are located, and
where groundwater or other forms of environmental contamination have occurred.
Our operations involve the risks of fuel spillage or seepage, environmental
damage, and hazardous waste disposal, among others. We also maintain underground
bulk fuel storage tanks and fueling islands at two of our facilities. A small
percentage of our freight consists of low-grade hazardous substances, which subjects
us to a wide array of regulations. If we are involved in a spill or other
accident involving hazardous substances, if there are releases of hazardous
substances we transport, or if we are found to be in violation of applicable
laws or regulations, we could be subject to liabilities that could have a
materially adverse effect on our business and operating results. If we should
fail to comply with applicable environmental regulations, we could be subject to
substantial fines or penalties and to civil and criminal liability.





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





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


14
 TABLE OF CONTENTS


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





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





Our
Board of Directors has authorized the repurchase of shares of our common stock
under a stock repurchase program.  The number of shares repurchased
and the effects of repurchasing the shares may have an adverse effect on debt,
equity, and liquidity of the Company.





On October
24, 2007, the Company's Board of Directors authorized a stock repurchase program
pursuant to which the Company purchased 2,000,000 shares of the Company's common
stock. On December 5, 2007, the Company announced that it had purchased all of
the shares of the Company's common stock previously authorized and that the
Company's Board of Directors authorized an additional stock repurchase program
pursuant to which the Company may purchase up to 2,000,000 additional shares of
the Company's common stock through December 3, 2008.  As any
repurchases would likely be funded from cash flow from operations and/or
possible borrowings under the Company's Credit Agreement, such repurchasing of
shares could reduce the amount of cash on hand or increase debt, and reduce
the Company's liquidity.





Item 1B.  Unresolved Staff
Comments





None.





Item 2.    
Properties





We
operate a network of 16 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
            
            CanadaBaltimore,
      MD (Leased)
            
            Guadalajara
      (Leased)
            
            Kitchener,
      ON (Leased)Dallas,
      TX (Owned)
            
            Mexico
      City (Leased)El Paso,
      TX (Owned)
            
            Monterrey
      (Leased)Greensboro,
      NC (Leased)
            
            Nuevo
      Laredo (Leased)Hampton,
      VA (Leased)
            
            Puebla
      (Leased)Indianapolis,
      IN (Leased)
            
            Silao
      (Leased)Laredo,
      TX (Owned and Leased)Richmond,
      VA (Leased)Nashville,
      TN (Leased)





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





Item 3.     Legal
Proceedings





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





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





No
matters were submitted for a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30,
2008.


15
 TABLE OF CONTENTS





PART
II





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





Price
Range of Common Stock





Our
common stock is listed on the NASDAQ Global Select Market under the symbol
"CLDN." The following table sets forth, for the periods indicated, the high and
low sales price per share of our common stock as reported by
NASDAQ.





Fiscal
      2007
            
            High
            
            
            LowQuarter
      ended September 30, 2006
            
            $
            23.73
            
            
            $
            14.66Quarter
      ended December 31, 2006
            
            $
            21.00
            
            
            $
            16.08Quarter
      ended March 31, 2007
            
            $
            18.64
            
            
            $
            14.92Quarter
      ended June 30, 2007
            
            $
            17.00
            
            
            $
            15.38Fiscal
      2008Quarter
      ended September 30, 2007
            
            $
            18.22
            
            
            $
            11.77Quarter
      ended December 31, 2007
            
            $
            11.45
            
            
            $
            6.50Quarter
      ended March 31, 2008
            
            $
            11.61
            
            
            $
            7.13Quarter
      ended June 30, 2008
            
            $
            11.68
            
            
            $
            9.15





On July
22, 2008, there were 208 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.





Stock
Repurchase Programs





On October 24, 2007, the Company's
Board of Directors authorized a stock repurchase program pursuant to which the
Company purchased 2,000,000 shares of the Company's common stock. On December 5,
2007, the Company announced that it had purchased all of the shares of the
Company's common stock previously authorized and that the Company's Board of
Directors authorized an additional stock repurchase program pursuant to which
the Company may purchase up to 2,000,000 additional shares of the Company's
common stock through December 3, 2008.  Shares may be purchased
in open market purchases, private transactions, or otherwise at such times and
from time to time, and at such prices and in such amounts as the Company
believes appropriate and in the best interests of its stockholders. The timing
and volume of repurchases will vary depending on market conditions and other
factors.  Purchases may be commenced or suspended at any time without
notice.


16
 TABLE OF CONTENTS




Below is
a summary of the Company's purchases of its common stock during the fiscal year
ended June 30, 2008:




Period
            
            (a)
      Total
              Number
      of
              Shares
              Purchased
            
            
            (b)
      Average
              Price
      Paid
              Per Share
            
            
            (c)
      Total Number
              of
      Shares
              Purchased
      as Part
              of
      Publicly
              Announced
      Plans
              orPrograms
            
            
            (d)
      Maximum
              Number
      of Shares
              that
      May Yet Be
              Purchased
      Under
              the
      Plans or
              Programs
              (at End ofPeriod)Total
      first quarter fiscal 2008
            
            
            0
            
            
            
            N/A
            
            
            
            0
            
            
            
            0Second
      quarter fiscal 2008 repurchases:October
            
            
            100,000
            
            
            $
            8.22
            
            
            
            100,000
            (1)
            
            
            1,900,000
            (1)November
            
            
            1,900,000
            
            
            $
            6.86
            
            
            
            1,900,000
            (1)
            
            
            0
            (1)December
            
            
            0
            
            
            
            0
            
            
            
            0
            (1)(2)
            
            
            2,000,000
            (1)(2)Total
      second quarter fiscal 2008
            
            
            2,000,000
            
            
            $
            6.92
            
            
            
            2,000,000
            (2)
            
            
            2,000,000
            (2)Total
      third quarter fiscal 2008
            
            
            0
            
            
            
            N/A
            
            
            
            0
            (2)
            
            
            2,000,000
            (2)Total
      fourth quarter fiscal 2008
            
            
            0
            
            
            
            N/A
            
            
            
            0
            (2)
            
            
            2,000,000
            (2)Total fiscal 2008
            
            
            2,000,000
            
            
            $
            6.92
            
            
            
            2,000,000
            (2)
            
            
            2,000,000
            (2)




(1)
            A
      stock repurchase program was authorized by the Company's Board of
      Directors and announced to the public on October 24,
      2007.  Pursuant to this program, the Company was authorized to
      purchase up to 2,000,000 shares of the Company's common stock in open
      market or negotiated transactions through October 31, 2008.  All
      2,000,000 shares were repurchased prior to December 5,
    2007.(2)
            A
      second stock repurchase program was authorized by the Company's Board of
      Directors and announced to the public on December 5,
      2007.  Pursuant to this program, the Company was authorized to
      purchase up to an additional 2,000,000 shares of the Company's common
      stock in open market or negotiated transactions through December 3,
      2008.  No shares have been repurchased by the Company pursuant
      to this second stock repurchase program, but the program has not been
      terminated.





17
 TABLE OF CONTENTS


Stock
Performance Graph











Company/Index/Peer
      Group
            
            6/30/03
            
            
            6/30/04
            
            
            6/30/05
            
            
            6/30/06
            
            
            6/30/07
            
            
            6/30/08Celadon
      Group, Inc.
            
            $
            100.00
            
            
            $
            194.28
            
            
            $
            186.55
            
            
            $
            547.41
            
            
            $
            394.91
            
            
            $
            248.12NASDAQ
      Stock Market (U.S.)
            
            $
            100.00
            
            
            $
            129.09
            
            
            $
            127.97
            
            
            $
            136.00
            
            
            $
            164.15
            
            
            $
            142.67NASDAQ
      Trucking & Transportation
            
            $
            100.00
            
            
            $
            127.08
            
            
            $
            147.72
            
            
            $
            201.41
            
            
            $
            217.11
            
            
            $
            184.39





18
 TABLE OF CONTENTS


Item 6.     Selected
Financial Data





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





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(in
      thousands, except per share data and operating data)Statements
      of Operations Data:Freight
      revenue(1)
            
            $
            457,482
            
            
            $
            433,012
            
            
            $
            414,465
            
            
            $
            399,656
            
            
            $
            382,918Fuel
      surcharge revenue
            
            
            108,413
            
            
            
            69,680
            
            
            
            65,729
            
            
            
            37,107
            
            
            
            15,005Total
      revenue
            
            
            565,895
            
            
            
            502,692
            
            
            
            480,194
            
            
            
            436,763
            
            
            
            397,923Operating
      expense(2)
            
            
            547,097
            
            
            
            462,592
            
            
            
            445,966
            
            
            
            413,355
            
            
            
            390,852Operating
      income(2)
            
            
            18,798
            
            
            
            40,100
            
            
            
            34,228
            
            
            
            23,408
            
            
            
            7,071Interest
      expense, net
            
            
            4,922
            
            
            
            3,511
            
            
            
            780
            
            
            
            1,418
            
            
            
            3,723Other
      expense (income)
            
            
            193
            
            
            
            109
            
            
            
            34
            
            
            
            13
            
            
            
            180Income
      before income taxes
            
            
            13,683
            
            
            
            36,480
            
            
            
            33,414
            
            
            
            21,977
            
            
            
            3,168Provision
      for income taxes
            
            
            7,147
            
            
            
            14,228
            
            
            
            12,866
            
            
            
            9,397
            
            
            
            3,443Net
      income (loss)(2)
            
            $
            6,536
            
            
            $
            22,252
            
            
            $
            20,548
            
            
            $
            12,580
            
            
            $
            (275
            )Diluted
      earnings (loss) per share(2)(3)
            
            $
            0.29
            
            
            $
            0.94
            
            
            $
            0.88
            
            
            $
            0.55
            
            
            $
            (0.02
            )Weighted
      average diluted shares outstanding(3)
            
            
            22,617
            
            
            
            23,698
            
            
            
            23,386
            
            
            
            23,013
            
            
            
            17,969Balance
      Sheet Data (at end of period):Net property and
      equipment
            
            $
            206,199
            
            
            $
            207,499
            
            
            $
            91,267
            
            
            $
            57,545
            
            
            $
            61,801Total
    assets
            
            
            329,335
            
            
            
            306,913
            
            
            
            190,066
            
            
            
            160,508
            
            
            
            151,310Long-term debt, revolving
      lines of credit, and capital lease obligations, including current
      maturities
            
            
            102,506
            
            
            
            94,642
            
            
            
            12,023
            
            
            
            7,344
            
            
            
            14,494Stockholders'
      equity
            
            
            143,852
            
            
            
            147,320
            
            
            
            121,427
            
            
            
            98,491
            
            
            
            82,830Operating
      Data:For
      period(4):Average revenue per loaded
      mile(5)
            
            $
            1.503
            
            
            $
            1.534
            
            
            $
            1.491
            
            
            $
            1.424
            
            
            $
            1.322Average revenue per total
      mile(5)
            
            $
            1.348
            
            
            $
            1.380
            
            
            $
            1.367
            
            
            $
            1.316
            
            
            $
            1.225Average revenue per tractor per
      week(5)
            
            $
            2,717
            
            
            $
            2,790
            
            
            $
            2,948
            
            
            $
            2,841
            
            
            $
            2,723Average length of
      haul
            
            
            935
            
            
            
            960
            
            
            
            1,004
            
            
            
            995
            
            
            
            994At
      end of period:Total tractors(6)
            
            
            2,929
            
            
            
            3,016
            
            
            
            2,732
            
            
            
            2,570
            
            
            
            2,531Average age of company
      tractors (in years)
            
            
            1.8
            
            
            
            1.6
            
            
            
            2.0
            
            
            
            1.9
            
            
            
            2.1Total trailers(6)
            
            
            9,052
            
            
            
            7,843
            
            
            
            7,630
            
            
            
            7,468
            
            
            
            6,966Average age of company
      trailers (in years)
            
            
            4.1
            
            
            
            3.8
            
            
            
            3.5
            
            
            
            3.6
            
            
            
            4.6


__________________________





(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)
            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.(4)
            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,
      Servicio de Transportation Jaguar, S.A. de C.V. ("Jaguar"); and our
      less-than truckload, local trucking (or "shuttle"), brokerage, and
      logistics.(5)
            Excludes
      fuel surcharges.(6)
            Total
      fleet, including equipment operated by our Mexican subsidiary,
      Jaguar.





19
 TABLE OF CONTENTS


Item 7.    
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, 2008, total revenue increased 12.6%, to $565.9
million from $502.7 million during fiscal 2007. Freight revenue, which
excludes revenue from fuel surcharges, increased 5.7%, to $457.5 million in
fiscal 2008 from $433.0 million in 2007. We generated net income of $6.5
million, or $0.29 per diluted share, for fiscal 2008 compared with net income of
$22.3 million, or $0.94 per diluted share, for 2007.





We
believe that a weakened freight market and increased industry-wide trucking
capacity in fiscal 2008 compared to fiscal 2007, as well as a sharp increase in
fuel prices, were the major factors that contributed to our decrease in net
income.  Decreased freight demand due to a slower economy caused a
decrease in truck utilization measured by miles per tractor.  In
addition, shippers used the less robust freight market to resist rate increases
and, in some cases, attempted to reduce freight rates.  The downward
pressure on our rates was somewhat offset by a decrease in average length of
haul.  As a result, average freight revenue per loaded mile excluding
fuel surcharge for 2008 decreased $0.031 per mile to $1.503, a 2.0%
decrease compared with $1.534 per mile for 2007. Average freight revenue per
tractor per week, our main measure of asset productivity, decreased by 2.6% to
$2,717 in 2008 compared with $2,790 for 2007. This decrease was due to lower
general freight demand and an increase in non-revenue miles, offset by a
decrease in fleet size to 2,929 tractors at June 30, 2008 from 3,016 tractors at
June 30, 2007. As the freight market weakened and we ran more empty miles to get
to our next load and position equipment for sale, our non-revenue miles
increased. Our operating ratio, excluding the effect of fuel surcharge,
increased to 95.9% for 2008 compared with 90.7% for 2007.





At June
30, 2008, our total balance sheet debt was $102.5 million and our total
stockholders' equity was $143.9 million, for a total debt to capitalization
ratio of 41.6%. At June 30, 2008, we had $22.4 million of available borrowing
capacity under our revolving credit facility and $2.3 million of cash on
hand.





Revenue





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





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





Expenses
and Profitability





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





20
 TABLE OF CONTENTS


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 slowed down,
many trucking companies have been forced to lower freight rates to keep their
trucks moving.  Over the long term, we expect a limited pool of
qualified drivers and intense competition to recruit and retain those drivers to
constrain overall industry capacity.  Assuming a return to economic
growth in U.S. manufacturing, retail, and other high volume shipping industries,
we expect to be able to raise freight rates in line with or faster than
costs.  Over the near term this may prove challenging in the current
freight environment.





Revenue
Equipment





We
operate 2,929 tractors and 9,052 trailers. Of our tractors at June 30, 2008,
1,687 were owned, 1,026 were acquired under operating leases, and 216 were
provided by independent contractors, who own and drive their own tractors. Of
our trailers at June 30, 2008, 2,321 were owned and 6,731 were acquired under
operating and capital leases.





Prior to
fiscal 2006, we had financed most of our new tractors under operating leases.
Beginning in fiscal 2006 and continuing through fiscal 2008, we have purchased
most of our new tractors with cash or borrowings.  We expect to
continue to use cash and borrowings on our credit facility for most tractor
purchases. Most of our new trailers are acquired with operating leases. These
leases generally run for a period of seven years for trailers. When we finance
revenue equipment acquisitions with operating leases, rather than borrowings or
capital leases, the interest component of our financing activities is recorded
as an "above-the-line" operating expense on our statements of
operations.  Accordingly, the trend toward financing more equipment
with cash and borrowings, and less through operating leases, improves our
operating ratio.





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





Outlook





Looking
forward, our profitability goal is to achieve an operating ratio of
approximately 90%. We expect this to require additional improvements in rate per
mile, non-revenue miles percentage, and miles per tractor compared with those
key performance indicators for fiscal 2008, to overcome expected additional cost
increases. Because a large percentage of our costs are variable, changes in
revenue per mile and non-revenue miles percentage affect our profitability to a
greater extent than changes in miles per tractor. For fiscal 2009, 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 and 2010 EPA engine
requirements), our fuel costs, and our insurance and claims. To overcome cost
increases and improve our margins, we will need to achieve increases in freight
revenue per tractor, particularly in revenue per mile, which we intend to
achieve by increasing rates and continuing to shift to more profitable freight.
Operationally, we will seek improvements in safety and driver recruiting and
retention. Our success in these areas primarily will affect revenue,
driver-related expenses, and insurance and claims expense.  Given the
difficult freight market confronting our industry, we believe achieving our
profitability goal during fiscal 2009 is unlikely, although we intend to
continue to strive toward that goal.





21
 TABLE OF CONTENTS


Results
of Operations





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





Fiscal year ended June
    30,2008
            
            
            2007
            
            
            2006Operating
      revenue
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Operating
      expenses:Salaries, wages, and employee
      benefits
            
            
            28.2
            
            
            
            28.8
            
            
            
            30.1Fuel
            
            
            28.8
            
            
            
            23.1
            
            
            
            22.8Operations and
      maintenance
            
            
            6.6
            
            
            
            6.4
            
            
            
            6.1Insurance and
      claims
            
            
            2.7
            
            
            
            2.6
            
            
            
            2.9Depreciation and
      amortization
            
            
            5.9
            
            
            
            4.4
            
            
            
            2.6Revenue equipment
      rentals
            
            
            4.5
            
            
            
            6.3
            
            
            
            8.2Purchased
      transportation
            
            
            14.5
            
            
            
            14.7
            
            
            
            14.6Cost of products and services
      sold
            
            
            1.1
            
            
            
            1.4
            
            
            
            1.1Communication and
      utilities
            
            
            0.9
            
            
            
            1.0
            
            
            
            0.9Operating taxes and
      licenses
            
            
            1.6
            
            
            
            1.7
            
            
            
            1.7General and other
      operating
            
            
            1.9
            
            
            
            1.6
            
            
            
            1.9Total operating
      expenses
            
            
            96.7
            
            
            
            92.0
            
            
            
            92.9Operating
      income
            
            
            3.3
            
            
            
            8.0
            
            
            
            7.1Other
      expense:Interest expense,
      net
            
            
            0.9
            
            
            
            0.7
            
            
            
            0.1Income
      before income taxes
            
            
            2.4
            
            
            
            7.3
            
            
            
            7.0Provision
      for income taxes
            
            
            1.2
            
            
            
            2.9
            
            
            
            2.7Net
      income
            
            
            1.2
            %
            
            
            4.4
            %
            
            
            4.3
            %







Freight
      revenue(1)
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Operating
      expenses:Salaries, wages, and employee
      benefits
            
            
            34.9
            
            
            
            33.5
            
            
            
            34.9Fuel
            
            
            12.0
            
            
            
            10.8
            
            
            
            10.5Operations and
      maintenance
            
            
            8.1
            
            
            
            7.5
            
            
            
            7.1Insurance and
      claims
            
            
            3.4
            
            
            
            3.0
            
            
            
            3.3Depreciation and
      amortization
            
            
            7.3
            
            
            
            5.1
            
            
            
            3.0Revenue equipment
      rentals
            
            
            5.6
            
            
            
            7.4
            
            
            
            9.6Purchased
      transportation
            
            
            18.0
            
            
            
            17.0
            
            
            
            17.0Cost of products and services
      sold
            
            
            1.4
            
            
            
            1.6
            
            
            
            1.3Communication and
      utilities
            
            
            1.1
            
            
            
            1.1
            
            
            
            1.0Operating taxes and
      licenses
            
            
            2.0
            
            
            
            2.0
            
            
            
            2.0General and other
      operating
            
            
            2.1
            
            
            
            1.7
            
            
            
            2.0Total operating
      expenses
            
            
            95.9
            
            
            
            90.7
            
            
            
            91.7Operating
      income
            
            
            4.1
            
            
            
            9.3
            
            
            
            8.3Other
      expense:Interest expense,
      net
            
            
            1.1
            
            
            
            0.9
            
            
            
            0.2Income
      before income taxes
            
            
            3.0
            
            
            
            8.4
            
            
            
            8.1Provision
      for income taxes
            
            
            1.6
            
            
            
            3.3
            
            
            
            3.1Net
      income
            
            
            1.4
            %
            
            
            5.1
            %
            
            
            5.0
            %







(1)
            Freight
      revenue is total operating revenue less fuel surcharges. In this table,
      fuel surcharges are eliminated from revenue and subtracted from fuel
      expense. The amounts were $108.4 million, $69.7 million, and $65.7 million
      in 2008, 2007 and 2006,
respectively.


22
 TABLE OF CONTENTS


Fiscal
year ended June 30, 2008, compared with fiscal year ended June 30,
2007





Total
revenue increased by $63.2 million, or 12.6%, to $565.9 million for fiscal
2008, from $502.7 million for fiscal 2007. Freight revenue excludes $108.4
million and $69.7 million of fuel surcharge revenue for fiscal 2008 and 2007,
respectively.





Freight
revenue increased by $24.5 million, or 5.7%, to $457.5 million for fiscal 2008,
from $433.0 million for fiscal 2007. This increase resulted from the
continuation of our efforts to eliminate the least favorable freight from our
system and the growth of customer relationships from our prior year
acquisitions, which more than offset softer freight demand
generally.  The increase was attributable to an increase in billed
miles to 253.3 million in fiscal 2008, compared to 237.8 million in fiscal 2007,
partially offset bya 2.3%
decrease in average freight revenue per total mile, excluding fuel surcharge, to
$1.348 from $1.380. The reduction in average freight revenue per total mile
resulted primarily from an increase in non-revenue miles. Average freight
revenue per tractor per week, excluding fuel surcharge, which is our primary
measure of asset productivity, decreased 2.6% to $2,717 in fiscal 2008, from
$2,790 for fiscal 2007, as a result of lower general freight demand and an
increase in non-revenue miles.  The decrease in miles per tractor and
an increase in non-revenue mile percentage were attributable to less freight
demand.





Revenue
for TruckersB2B was $9.3 million in fiscal 2008, compared to
$10.0 million in fiscal 2007. The decrease was related to a decrease in
tractor and trailer rebate revenue, partially due to the discontinuance of the
trailer incentive program, and decreases in the fuel rebates due to small and
mid size carriers being adversely affected by weak freight demand.





Salaries,
wages, and employee benefits were $159.9 million, or 34.9% of freight
revenue, for fiscal 2008, compared to $144.8 million, or 33.5% of freight
revenue, for fiscal 2007. These increases were primarily due to increased driver
payroll, resulting from a 10.2% increase in company miles.





Fuel
expenses, net of fuel surcharge revenue of $108.4 million and $69.7 million for
fiscal 2008 and fiscal 2007, respectively, increased to $54.7 million, or 12.0%
of freight revenue, for fiscal 2008, compared to $46.6 million, or 10.8% of
freight revenue, for fiscal 2007. These increases were due to an increase of
10.2% in company miles, an increase in non-revenue miles and an increase in
average fuel prices of approximately $0.82 per gallon. In addition, we began to
experience lower fuel economy and higher costs of fuel from the installation of
EPA-mandated new engines and use of ultra-low-sulfur diesel fuel. Higher fuel
prices and lower fuel economy will increase our operating expenses to the extent
we cannot offset them with surcharges.





Operations
and maintenance consist of direct operating expense, maintenance, and tire
expense. This category increased to $37.2 million, or 8.1% of freight
revenue, for fiscal 2008, from $32.3 million, or 7.5% of freight revenue,
for fiscal 2007. These increases are primarily related to an increase in costs
associated with various direct expenses such as toll expense, border drayage
expense, and scales expense and an increase in physical damage expense, due to
increased accidents.





Insurance
and claims expense was $15.5 million, or 3.4% of freight revenue, for fiscal
2008, compared to $13.1 million, or 3.0% of freight revenue, for fiscal
2007. Insurance and claims increased as a percentage of freight revenue due to
increased number of claims, increased claim dollars, increased number of
workers' compensation claims, and increased dollar of workers' compensation
claims.  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.





23
 TABLE OF CONTENTS


Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased to $33.3 million, or 7.3% of freight revenue, in fiscal 2008 from
$21.9 million, or 5.1% of freight revenue, for fiscal 2007. These increases
are related to the conversion of operating leases to capital leases related to
approximately 3,700 trailers, in the third and fourth quarters of fiscal 2007,
resulting from the Company declaring its intent to purchase certain trailers
previously financed with operating leases. The conversion of the trailer leases
resulted in a simultaneous decrease in our revenue equipment rentals. Revenue
equipment held under operating leases is not reflected on our balance sheet and
the expenses related to such equipment are reflected on our statements of
operations in revenue equipment rentals, rather than in depreciation and
amortization and interest expense, as is the case for revenue equipment that is
financed with borrowings or capital leases. In addition, we have continued to
purchase tractors with cash and borrowings, which has increased our tractor
depreciation.  In the near term we expect to purchase new
tractors primarily with cash or finance new trailers with operating leases.
Accordingly, going forward we expect depreciation and amortization will increase
as a percentage of freight revenue and revenue equipment rentals will decrease
as a percentage of freight revenue as increased depreciation expense associated
with tractors acquired with cash or borrowings will more than offset decreased
depreciation resulting from financing new trailer acquisitions with operating
leases.





Revenue
equipment rentals were $25.6 million, or 5.6% of freight revenue, in fiscal
2008, compared to $31.9 million, or 7.4% of freight revenue, for fiscal
2007. These decreases were attributable to a decrease in our tractor fleet
financed under operating leases as discussed under depreciation and
amortization. At June 30, 2008, 1,026 tractors, or 37.8% of our company
tractors, were held under operating leases, compared to 1,433 tractors, or 54.8%
of our company tractors, at June 30, 2007.  Given the level of new
tractors expected to be purchased with cash or borrowings and new trailers
expected to be financed under operating leases, we expect revenue equipment
rentals will continue to decrease going forward.





Purchased
transportation increased to $82.2 million, or 18.0% of freight revenue, for
fiscal 2008, from $73.7 million, or 17.0% of freight revenue, for fiscal
2007. These increases are primarily related to increases in our third-party
carrier expense and warehousing expenses, related to an effort to grow these
portions of our business.  Our independent contractor expense was
largely unchanged as a percentage of freight revenuebetween fiscal 2007 and
fiscal 2008, as a 45.9% decrease in independent contractors to 216 at June 30,
2008, from 399 at June 30, 2007, was offset by increased fuel surcharge
reimbursement. The challenging freight environment has had a negative impact on
independent contractors, who are drivers who cover all their operating expenses
(fuel, driver salaries, maintenance, and equipment costs) for a fixed payment
per mile.





All of
our other expenses are relatively minor in amount, and there were no significant
changes in these expenses. Accordingly, we have not provided a detailed
discussion of such 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, decreased to 3.0% of freight revenue for fiscal 2008 from
8.4% for fiscal 2007.





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. The higher
Canadian dollar, which increased to a .990 relationship with the U.S. dollar for
fiscal 2008, from a .884 relationship with the U.S. dollar for fiscal 2007,
negatively impacted earnings per share by approximately $.11.





Income
taxes decreased to $7.1 million for fiscal 2008, from $14.2 million
for fiscal 2007, due to lower pre-tax income. Due to the non-deductible effects
of our driver per diem pay structure, our tax rate will fluctuate from the 35%
standard federal rate, in future periods as net income fluctuates.





As a result of the factors described
above, net income decreased to $6.5 million for fiscal 2008, from $22.3 million
for fiscal 2007.





24
 TABLE OF CONTENTS


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





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





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





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





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





Fuel
expenses, net of fuel surcharge revenue of $69.7 million and $65.7 million for
fiscal 2007 and fiscal 2006, respectively, increased to $46.6 million, or
10.8% of freight revenue, for fiscal 2007, compared to $43.5 million, or
10.5% of freight revenue, for fiscal 2006. These increases were due to an
increase of 2.4% in company miles and an increase in average fuel prices of
approximately $0.04 per gallon. In addition, we began to experience lower fuel
economy and higher costs of fuel from the installation of EPA-mandated new
engines and use of ultra-low-sulfur diesel fuel.





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





Insurance
and claims expense was $13.1 million, or 3.0% of freight revenue, for fiscal
2007, compared to $13.7 million, or 3.3% of freight revenue, for fiscal
2006.  Insurance and claims expense varies based primarily on the frequency
and severity of claims, the level of our self-insured retention, and our premium
expense.





Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased to $21.9 million, or 5.1% of freight revenue, in fiscal 2007 from
$12.4 million, or 3.0% of freight revenue, for fiscal 2006. The majority of
these increases can be attributed to the addition of tractors purchased with
cash and borrowings and the conversion of operating leases to capital leases
related to approximately 3,700 trailers. The remaining increase in this expense
category was attributable to the acquisition of certain assets of Digby in
October 2006, Warrior in February 2007, and Air Road in June 2007. In the third
and fourth quarters of fiscal 2007, the Company declared its intent to purchase
certain trailers previously financed with operating leases, resulting in a
change from operating to capital lease classification. The conversion of the
trailer leases also resulted in a decrease in our revenue equipment rentals in
fiscal 2007.


25
 TABLE OF CONTENTS


Revenue
equipment rentals were $31.9 million, or 7.4% of freight revenue, in fiscal
2007, compared to $39.6 million, or 9.6% of freight revenue, for fiscal
2006. These decreases were attributable to a decrease in our tractor and trailer
fleet financed under operating leases as discussed under depreciation and
amortization. As of June 30, 2007, we had financed 1,433 tractors and 1,916
trailers under operating leases, as compared to 1,440 tractors and 6,453
trailers as of June 2006.





Purchased
transportation increased to $73.7 million, or 17.0% of freight revenue, for
fiscal 2007, from $70.3 million, or 17.0% of freight revenue, for fiscal
2006. The increase in the overall dollar amount was primarily related to
increased independent contractor expense, as the number of independent
contractors increased by 13.7% to 399 at June 30, 2007, from 351 at June 30,
2006. This increase was partially due to increased payments to independent
contractors resulting from fuel surcharges collected due to rising fuel costs,
which are passed through to our independent contractors on a per mile basis. The
number of independent contractors grew in fiscal 2007 as the Company partnered
with several financing companies to make it easier for drivers to purchase
trucks.





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





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





Income
taxes increased to $14.2 million for fiscal 2007, from $12.9 million
for fiscal 2006.





As a result of the factors described
above, net income increased to $22.3 million for fiscal 2007, from $20.5 million
for fiscal 2006.





Liquidity
and Capital Resources





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





As of
June 30, 2008, we had on order 1,870 tractors and 400 trailers for delivery
through fiscal 2010. These revenue equipment orders represent a capital
commitment of approximately $186.4 million, before considering the proceeds of
equipment dispositions. In fiscal 2008, we purchased the majority of our
new tractors with cash or borrowings, and we acquired most of the new trailers
under off-balance sheet operating leases.  In the third and fourth
quarters of fiscal 2007, we also declared our intent to purchase approximately
3,700 trailers at the end of the respective lease term, resulting in a change
from operating lease to capital lease classification. At June 30, 2008 our
total balance sheet debt, including capital lease obligations and current
maturities, was $102.5 million, compared to $94.6 million at June 30, 2007,
and $12.0 million at June 30, 2006. Our debt-to-capitalization ratio
(total balance sheet debt as a percentage of total balance sheet debt plus total
stockholders' equity) was 41.6% at June 30, 2008, 39.1% at June 30,
2007, and 9.0% at June 30, 2006.





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





26
 TABLE OF CONTENTS


Cash
Flows





We
generated net cash from operating activities of $37.5 million in fiscal
2008, $53.6 million in fiscal 2007, and $30.7 million in fiscal 2006.
The decrease in net cash provided by operations in fiscal 2008 from fiscal 2007
is due primarily to lower earnings, the increase of trade receivables, income
tax recoverable, and prepaid expenses and other current assets, offset by the
increase of depreciation and amortization.





Net cash
used in investing activities was $31.4 million for fiscal 2008, compared to
$61.2 million for fiscal 2007, and $44.3 million for fiscal 2006. The
decrease in cash used for investing activities from 2007 to 2008 was primarily
due to the $32.4 million of cash used to purchase Digby in October 2006, Warrior
in February 2007, and Air Road in June 2007. Cash used in 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 $69.0
million in fiscal 2008, $66.8 million in fiscal 2007, excluding the assets
purchased from Digby, Warrior, and Air Road, and $95.8 million in fiscal 2006.
We generated proceeds from the sale of property and equipment of
$37.6 million in fiscal 2008, $37.9 million in fiscal 2007, and
$51.4 million in fiscal 2006.





Net cash
used in financing activities was $4.9 million in fiscal 2008, compared to net
cash provided by financing activities of $7.2 million in fiscal 2007, and
$4.2 million in fiscal 2006.  The increase in cash used was
primarily due to the repurchase of $13.8 million of the Company's common stock
between October and December 2007 pursuant to the Company's publicly announced
stock repurchase program. Financing activity represents bank borrowings (new
borrowings, net of repayments) and payment of the principal component of capital
lease obligations.





Off-Balance
Sheet Arrangements





Operating
leases have been an important source of financing for our revenue equipment. Our
operating leases include some under which we do not guarantee the value of the
asset at the end of the lease term ("walk-away leases") and some under which we
do guarantee the value of the asset at the end of the lease term ("residual
value"). Therefore, we are subject to the risk that equipment value may decline
in which case we would suffer a loss upon disposition and be required to make
cash payments because of the residual value guarantees. We were obligated for
residual value guarantees related to operating leases of $67.1 million at
June 30, 2008 compared to $62.7 million at June 30, 2007. A small portion
of these amounts is covered by repurchase and/or trade agreements we have with
the equipment manufacturer. We believe that any residual payment obligations
that are not covered by the manufacturer will be satisfied, in the aggregate, by
the value of the related equipment at the end of the lease. To the extent the
expected value at the lease termination date is lower than the residual
value guarantee, we would accrue for the difference over the remaining lease
term. We anticipate that going forward we will use cash generated from
operations to finance tractor purchases and operating leases to finance trailer
purchases.





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





Primary Credit Agreement





On September 26, 2005, Celadon Group,
Inc., Celadon Trucking Services, Inc., and TruckersB2B entered into an unsecured
Credit Agreement (the "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.
The Credit Agreement was amended on December 23, 2005, by the First Amendment to
Credit Agreement, pursuant to which Celadon Logistics Services, Inc. was added
as a borrower to the Credit Agreement. The Credit Agreement, as amended by the
Third Amendment on January 22, 2008, matures on January 23, 2013.  The
Credit Agreement 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., and Jaguar, each of which is a
subsidiary of the Company.


27
 TABLE OF CONTENTS


The Credit Agreement, as amended by the
Third Amendment, has a maximum revolving borrowing limit of $70.0 million, and
the Company may increase the revolving borrowing limit by an additional $20.0
million, to a total of $90.0 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, 2008, and expect to remain in compliance for the
foreseeable future.  At June 30, 2008, $43.1 million of our credit
facility was utilized as outstanding borrowings and $4.5 million was utilized
for standby letters of credit.





Contractual
Obligations and Commitments





As of
June 30, 2008, 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, 2008
              (in
      thousands)
              Payments
      Due by PeriodTotal
            
            
            Less
      than
              One Year
            
            
            One
      to
              Three
              Years
            
            
            Three
              to
      Five
              Years
            
            
            More
      Than
              Five
              YearsOperating
      leases
            
            $
            78,172
            
            
            $
            20,923
            
            
            $
            26,230
            
            
            $
            17,034
            
            
            $
            13,985Lease
      residual value guarantees
            
            
            67,053
            
            
            
            13,086
            
            
            
            21,019
            
            
            
            10,317
            
            
            
            22,631Capital
      lease obligations(1)
            
            
            54,484
            
            
            
            8,554
            
            
            
            25,322
            
            
            
            20,608
            
            
            
            ---Long-term
      debt (1)
            
            
            56,640
            
            
            
            10,894
            
            
            
            2,592
            
            
            
            44
            
            
            
            43,110Sub-total
            
            
            256,349
            
            
            
            53,457
            
            
            
            75,163
            
            
            
            48,003
            
            
            
            79,726Future
      purchase of revenue equipment
            
            
            186,350
            
            
            
            76,741
            
            
            
            79,706
            
            
            
            24,350
            
            
            
            5,553Employment
      and consulting agreements(2)
            
            
            655
            
            
            
            655
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Standby
      letters of credit
            
            
            4,500
            
            
            
            4,500
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
      contractual and cash obligations
            
            $
            447,854
            
            
            $
            135,353
            
            
            $
            154,869
            
            
            $
            72,353
            
            
            $
            85,279








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





Inflation





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





Critical
Accounting Policies





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


28
 TABLE OF CONTENTS


Depreciation of Property and
Equipment. We depreciate our property and equipment using the
straight-line method over the estimated useful life of the asset. We generally
use estimated useful lives of 2 to 7 years for new tractors and trailers, and
estimated salvage values for new tractors and trailers generally range from 35%
to 50% of the capitalized cost. 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 all equipment, 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") No. 13,
"Accounting for
Leases," property and equipment held under operating leases, and
liabilities related thereto, are not reflected on our balance sheet. All
expenses related to revenue equipment operating leases are reflected on our
statements of operations in the line item entitled "Revenue equipment rentals."
As such, financing revenue equipment with operating leases instead of bank
borrowings or capital leases effectively moves the interest component of the
financing arrangement into operating expenses on our statements of
operations.





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





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


29
 TABLE OF CONTENTS


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





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





Recent
Accounting Pronouncements





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





In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements
required under other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. It also
establishes a fair value hierarchy that prioritizes information used in
developing assumptions when pricing an asset or liability.  SFAS 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued Staff Position No. 157-2, which provides a
one-year delayed application of SFAS 157 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The Company
must adopt these new requirements no later than its first quarter of fiscal
2010.





In
December 2007, FASB issued SFAS No. 141R (revised 2007),Business Combinations("SFAS 141R"), which
replaces SFAS No. 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS 141R is effective for us beginning July 1, 2009 and will
apply prospectively to business combinations completed on or after that
date.





In
December 2007, FASB issued SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51("SFAS 160"),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent's equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. SFAS 160 is effective for us
beginning July 1, 2009 and will apply prospectively, except for the presentation
and disclosure requirements, which will apply retrospectively. We are currently
assessing the potential impact that adoption of SFAS 160 would have on our
financial statements.





In March
2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133, ("SFAS 161"). SFAS 161 requires enhanced disclosures about
an entity's derivative and hedging activities, including (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedged items are accounted for under SFAS No. 133, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is effective for
financial statements issued for fiscal years beginning after Nov. 15, 2008.
Accordingly, the Company will adopt SFAS 161 in fiscal year
2010.


30
 TABLE OF CONTENTS





Item 7A.  Quantitative and
Qualitative Disclosures About Market Risk





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





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, 2008, the interest rate for
revolving borrowings under our credit facility was LIBOR plus 0.875%. At June
30, 2008, we had $43.1 million variable rate term loan borrowings outstanding
under the credit facility. A hypothetical 10% increase in the bank's base rate
and LIBOR would be immaterial to our net income.





Foreign Currency Exchange Rate
Risk. We are subject to foreign currency exchange rate risk, specifically
in connection with our Canadian operations. While virtually all of the expenses
associated with our Canadian operations, such as independent contractor costs,
company driver compensation, and administrative costs, are paid in Canadian
dollars, a significant portion of our revenue generated from those operations is
billed in U.S. dollars because many of our customers are U.S. shippers
transporting goods to or from Canada. As a result, increases in the Canadian
dollar exchange rate adversely affect the profitability of our Canadian
operations. Assuming revenue and expenses for our Canadian operations identical
to the year ended June 30, 2008 (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 $234,000.  As of June 30, 2008, we
had none of our currency exposure hedged.





We
generally do not face the same magnitude of foreign currency exchange rate risk
in connection with our intra-Mexico operations conducted through our Mexican
subsidiary, Jaguar, because our foreign currency revenues are generally
proportionate to our foreign currency expenses for those operations. For
purposes of consolidation, however, the operating results earned by our
subsidiaries, including Jaguar, in foreign currencies are converted into United
States dollars. As a result, a decrease in the value of the Mexican peso could
adversely affect our consolidated results of operations. Assuming revenue and
expenses for our Mexican operations identical to the year ended June 30, 2008
(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 $63,000.





Commodity Price Risk.
Shortages of fuel, increases in prices, or rationing of petroleum products can
have a materially adverse effect on our operations and profitability. Fuel is
subject to economic, political, and market factors that are outside of our
control. Historically, we have sought to recover a portion of short-term
increases in fuel prices from customers through the collection of fuel
surcharges. However, fuel surcharges do not always fully offset increases in
fuel prices. In addition, from time-to-time we may enter into derivative
financial instruments to reduce our exposure to fuel price fluctuations. As of
June 30, 2008, we had none of our estimated fuel purchases hedged.





Item 8.    
Financial Statements and Supplementary Data





The
following statements are filed with this report:





Report of Independent Registered Public Accounting Firm - KPMG
LLP;


Consolidated Balance Sheets;


Consolidated Statements of Operations;


Consolidated Statements of Cash Flows;


Consolidated Statements of Stockholders' Equity;
and


Notes to Consolidated Financial Statements.





31
 TABLE OF CONTENTS





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





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




We have
audited the accompanying consolidated balance sheets of Celadon Group, Inc. and
subsidiaries (the "Company") as of June 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 2008. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement Schedule I. We also have audited the Company's internal
control over financial reporting as of June 30, 2008, based on criteria
established in Internal Control
— Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying management's report on internal control. Our responsibility is to
express an opinion on these consolidated financial statements and an opinion on
the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
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. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.




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, 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, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2008, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement Schedule I, 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. Also in our opinion, Celadon Group, Inc. and subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of June 30, 2008, based on criteria established in Internal Control — Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.




In
fiscal 2006, as disclosed in Note 7 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based
Payment.




/s/KPMG
LLP




Indianapolis,
Indiana




August
28, 2008




32
 TABLE OF CONTENTS


CELADON GROUP, INC.


CONSOLIDATED
BALANCE SHEETS


June
30, 2008 and 2007


(Dollars
in thousands)





ASSETS
            
            2008
            
            
            2007Current
      assets:Cash and cash
      equivalents
            
            $
            2,325
            
            
            $
            1,190Trade receivables, net of
      allowance for doubtful accounts of $1,194
              and
      $1,176 in 2008 and 2007, respectively
            
            
            69,513
            
            
            
            59,387Prepaid expenses and other
      current assets
            
            
            16,697
            
            
            
            10,616Tires in
    service
            
            
            3,765
            
            
            
            3,012Equipment held for
      resale
            
            
            ---
            
            
            
            11,154Income tax
      receivable
            
            
            5,846
            
            
            
            1,526Deferred income
      taxes
            
            
            3,035
            
            
            
            2,021Total
      current assets
            
            
            101,181
            
            
            
            88,906Property
      and equipment
            
            
            270,832
            
            
            
            240,898Less
      accumulated depreciation and amortization
            
            
            64,633
            
            
            
            44,553Net
      property and equipment
            
            
            206,199
            
            
            
            196,345Tires
      in service
            
            
            1,483
            
            
            
            1,449Goodwill
            
            
            19,137
            
            
            
            19,137Other
      assets
            
            
            1,335
            
            
            
            1,076Total
      assets
            
            $
            329,335
            
            
            $
            306,913LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
    payable
            
            $
            6,910
            
            
            $
            7,959Accrued salaries and
      benefits
            
            
            11,358
            
            
            
            11,779Accrued insurance and
      claims
            
            
            9,086
            
            
            
            6,274Accrued fuel
      expense
            
            
            12,170
            
            
            
            6,425Other accrued
      expenses
            
            
            11,916
            
            
            
            12,157Current maturities of
      long-term debt
            
            
            8,290
            
            
            
            10,736Current maturities of capital
      lease obligations
            
            
            6,454
            
            
            
            6,228Total
      current liabilities
            
            
            66,184
            
            
            
            61,558Long-term debt, net of current
      maturities
            
            
            45,645
            
            
            
            28,886Capital lease obligations, net
      of current maturities
            
            
            42,117
            
            
            
            48,792Deferred income
      taxes
            
            
            31,512
            
            
            
            20,332Minority
    interest
            
            
            25
            
            
            
            25Stockholders'
      equity:Common stock, $0.033 par
      value, authorized 40,000,000 shares; issued
              and
      outstanding 23,704,046 and 23,581,245 shares at June 30,
              2008 and
      2007, respectively
            
            
            782
            
            
            
            778Treasury stock at
      cost;  1,832,386 and 0 shares at June 30, 2008 and
              2007,
      respectively
            
            
            (12,633
            )
            
            
            ---Additional paid-in
      capital
            
            
            95,173
            
            
            
            93,582Retained
    earnings
            
            
            60,881
            
            
            
            54,345Accumulated other
      comprehensive loss
            
            
            (351
            )
            
            
            (1,385
            )Total
      stockholders' equity
            
            
            143,852
            
            
            
            147,320Total
      liabilities and stockholders' equity
            
            $
            329,335
            
            
            $
            306,913





See
accompanying notes to consolidated financial statements.





33
 TABLE OF CONTENTS


CELADON GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
ended June 30, 2008, 2007, and 2006


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





2008
            
            
            2007
            
            
            2006Revenue:Freight revenue
            
            $
            457,482
            
            
            $
            433,012
            
            
            $
            414,465Fuel surcharges
            
            
            108,413
            
            
            
            69,680
            
            
            
            65,729Total revenue
            
            
            565,895
            
            
            
            502,692
            
            
            
            480,194Operating
      expenses:Salaries, wages, and employee
      benefits
            
            
            159,859
            
            
            
            144,845
            
            
            
            144,634Fuel
            
            
            163,111
            
            
            
            116,251
            
            
            
            109,253Operations and
      maintenance
            
            
            37,213
            
            
            
            32,299
            
            
            
            29,411Insurance and
    claims
            
            
            15,527
            
            
            
            13,054
            
            
            
            13,697Depreciation and
      amortization
            
            
            33,264
            
            
            
            21,880
            
            
            
            12,442Revenue equipment
      rentals
            
            
            25,596
            
            
            
            31,900
            
            
            
            39,601Purchased
      transportation
            
            
            82,205
            
            
            
            73,699
            
            
            
            70,305Cost of products and services
      sold
            
            
            6,406
            
            
            
            6,961
            
            
            
            5,433Communications and
      utilities
            
            
            5,117
            
            
            
            4,838
            
            
            
            4,148Operating taxes and
      licenses
            
            
            9,112
            
            
            
            8,629
            
            
            
            8,247General and other
      operating
            
            
            9,687
            
            
            
            8,236
            
            
            
            8,795Total operating
      expenses
            
            
            547,097
            
            
            
            462,592
            
            
            
            445,966Operating
      income
            
            
            18,798
            
            
            
            40,100
            
            
            
            34,228Other
      (income) expense:Interest income
            
            
            (106
            )
            
            
            (21
            )
            
            
            (153
            )Interest expense
            
            
            5,028
            
            
            
            3,532
            
            
            
            933Other
            
            
            193
            
            
            
            109
            
            
            
            34Income
      before income taxes
            
            
            13,683
            
            
            
            36,480
            
            
            
            33,414Provision
      for income taxes
            
            
            7,147
            
            
            
            14,228
            
            
            
            12,866Net income
            
            $
            6,536
            
            
            $
            22,252
            
            
            $
            20,548Earnings
      per common share:Diluted earnings per share(1)
            
            $
            0.29
            
            
            $
            0.94
            
            
            $
            0.88Basic earnings per share(1)
            
            $
            0.29
            
            
            $
            0.96
            
            
            $
            0.90Weighted
      average shares outstanding:Diluted(1)
            
            
            22,617
            
            
            
            23,698
            
            
            
            23,386Basic(1)
            
            
            22,378
            
            
            
            23,252
            
            
            
            22,828


_________________________





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





See
accompanying notes to consolidated financial statements.





34
 TABLE OF CONTENTS





CELADON GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
ended June 30, 2008, 2007, and 2006


(Dollars
in thousands)





2008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net income
            
            $
            6,536
            
            
            $
            22,252
            
            
            $
            20,548Adjustments
      to reconcile net income to net cash provided by operating
              activities:Depreciation and
      amortization
            
            
            32,432
            
            
            
            21,625
            
            
            
            12,985(Gain) loss on sale of
      equipment
            
            
            833
            
            
            
            255
            
            
            
            (543
            )Provision for deferred income
      taxes
            
            
            10,166
            
            
            
            10,311
            
            
            
            2,017Provision for doubtful
      accounts
            
            
            911
            
            
            
            366
            
            
            
            786Stock based compensation
      expense
            
            
            1,905
            
            
            
            1,827
            
            
            
            5,059Changes in assets and
      liabilities:Trade receivables
            
            
            (11,037
            )
            
            
            (4,291
            )
            
            
            (488
            )Income tax
    receivable
            
            
            (4,320
            )
            
            
            3,690
            
            
            
            (5,216
            )Tires in service
            
            
            (786
            )
            
            
            (154
            )
            
            
            741Prepaid expenses and other
      current assets
            
            
            (6,081
            )
            
            
            (484
            )
            
            
            (3,805
            )Other assets
            
            
            243
            
            
            
            381
            
            
            
            1,164Accounts payable and accrued
      expenses
            
            
            6,693
            
            
            
            (2,185
            )
            
            
            (639
            )Income tax
payable
            
            
            ---
            
            
            
            ---
            
            
            
            (1,957
            )Net cash provided by operating
      activities
            
            
            37,495
            
            
            
            53,593
            
            
            
            30,652Cash
      flows from investing activities:Purchase of property and
      equipment
            
            
            (69,021
            )
            
            
            (66,783
            )
            
            
            (95,753
            )Proceeds on sale of property
      and equipment
            
            
            37,586
            
            
            
            37,933
            
            
            
            51,417Purchase of
      businesses
            
            
            --------
            
            
            
            (32,383
            )
            
            
            ---Net cash used in investing
      activities
            
            
            (31,435
            )
            
            
            (61,233
            )
            
            
            (44,336
            )Cash
      flows from financing activities:Proceeds from issuance of
      common stock
            
            
            1,059
            
            
            
            985
            
            
            
            1,060Repurchase of
      stock
            
            
            (13,848
            )
            
            
            ---
            
            
            
            ---Tax benefit from issuance of
      common stock
            
            
            --
            
            
            
            12
            
            
            
            635Proceeds of long-term
      debt
            
            
            25,110
            
            
            
            13,250
            
            
            
            4,750Payments on long-term
      debt
            
            
            (10,797
            )
            
            
            (4,180
            )
            
            
            (1,354
            )Principal payments on capital
      lease obligations
            
            
            (6,449
            )
            
            
            (2,911
            )
            
            
            (848
            )Net cash provided by (used in)
      financing activities
            
            
            (4,925
            )
            
            
            7,156
            
            
            
            4,243Increase
      (decrease) in cash and cash equivalents
            
            
            1,135
            
            
            
            (484
            )
            
            
            (9,441
            )Cash
      and cash equivalents at beginning of year
            
            
            1,190
            
            
            
            1,674
            
            
            
            11,115Cash
      and cash equivalents at end of year
            
            $
            2,325
            
            
            $
            1,190
            
            
            $
            1,674Supplemental
      disclosure of cash flow information:Interest paid
            
            $
            5,188
            
            
            $
            3,475
            
            
            $
            914Income taxes
    paid
            
            $
            3,132
            
            
            $
            6,701
            
            
            $
            17,141Supplemental
      disclosure of non-cash investing activities:Lease obligation/debt incurred
      in the purchase of equipment
            
            $
            ---
            
            
            $
            76,461
            
            
            $
            2,131Note payable obligation
      incurred in purchase of minority shares
            
            
            ---
            
            
            
            ---
            
            
            $
            ---





See
accompanying notes to consolidated financial statements.





35
 TABLE OF CONTENTS





CELADON GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


Years
ended June 30, 2008, 2007, and 2006


(Dollars
in thousands, except share amounts)





Common
              Stock
              No.
      of Shares
              Outstanding
            
            
            Amount
            
            
            Additional
              Paid-In
              Capital
            
            
            Treasury
      Stock
            
            
            Retained
              Earnings
              (Deficit)
            
            
            Accumulated
              Other
              Comprehensive
              Income/(Loss)
            
            
            Unearned
              Compensation
            
            
            Total
              Stock-
              Holders'
              EquityBalance
      at June 30, 2005
            
            
            22,613,510
            
            
            $
            746
            
            
            $
            88,945
            
            
            $
            ---
            
            
            $
            11,544
            
            
            $
            (2,033
            )
            
            $
            (711
            )
            
            $
            98,491Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548Equity
      adjustments for foreign currency translation, net of
      tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (223
            )
            
            
            ---
            
            
            
            (223
            )Comprehensive
      income (loss)
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,548
            
            
            
            (223
            )
            
            
            ---
            
            
            
            20,325Tax
      benefits from stock options
            
            
            ---
            
            
            
            ---
            
            
            
            635
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            635Secondary
      stock offering
            
            
            (172
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Restricted
      stock grants
            
            
            121,680
            
            
            
            4
            
            
            
            201
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            711
            
            
            
            916Exercise
      of incentive stock options
            
            
            376,349
            
            
            
            13
            
            
            
            1,047
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,060Balance
      at June 30, 2006
            
            
            23,111,367
            
            
            $
            763
            
            
            $
            90,828
            
            
            
            ---
            
            
            $
            32,092
            
            
            $
            (2,256
            )
            
            $
            ---
            
            
            $
            121,427Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253Equity
      adjustments for foreign currency translation, net of
      tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            871
            
            
            
            ---
            
            
            
            871Comprehensive
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            22,253
            
            
            
            871
            
            
            
            ---
            
            
            
            23,124Tax
      benefits from stock options
            
            
            ---
            
            
            
            ---
            
            
            
            12
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            12Restricted
      stock and options expense
            
            
            68,160
            
            
            
            2
            
            
            
            1,770
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,772Exercise
      of incentive stock options
            
            
            401,718
            
            
            
            13
            
            
            
            972
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            985Balance
      at June 30, 2007
            
            
            23,581,245
            
            
            $
            778
            
            
            $
            93,582
            
            
            $
            ---
            
            
            $
            54,345
            
            
            $
            (1,385
            )
            
            $
            ---
            
            
            $
            147,320Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,536
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,536Equity
      adjustments for foreign currency translation, net of
      tax
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,034
            
            
            
            ---
            
            
            
            1,034Comprehensive
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,536
            
            
            
            1,034
            
            
            
            ---
            
            
            
            7,570Treasury
      stock purchases
            
            
            (2,000,000
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (13,848
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (13,848
            )Treasury
      stock issued
            
            
            ---
            
            
            
            (5
            )
            
            
            (1,180
            )
            
            
            1,185
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Restricted
      stock and options expense
            
            
            28,974
            
            
            
            1
            
            
            
            1,751
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,750Exercise
      of incentive stock options
            
            
            261,441
            
            
            
            8
            
            
            
            1,021
            
            
            
            30
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,059Balance
      at June 30, 2008
            
            
            21,871,660
            
            
            $
            782
            
            
            $
            95,173
            
            
            $
            (12,633
            )
            
            $
            60,881
            
            
            $
            (351
            )
            
            $
            ---
            
            
            $
            143,852





See
accompanying notes to consolidated financial statements.





36
 TABLE OF CONTENTS


CELADON GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








(1) ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization





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





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





Summary
of Significant Accounting Policies





Principles
of Consolidation and Presentation





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





Use
of Estimates





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





Cash
and Cash Equivalents





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





Concentration
of Credit Risk





Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of trade receivables. The Company performs ongoing
credit evaluations of its customers and does not require collateral for its
accounts receivable. The Company maintains reserves which management believes
are adequate to provide for potential credit losses. Uncollectible accounts
receivable are written off against the reserves. Concentrations of credit risk
with respect to trade receivables are generally limited due to the Company's
large number of customers and the diverse range of industries which they
represent. Accounts receivable balances due from any single customer did not
total more than 5% of the Company's gross trade receivables at June 30,
2008.





37
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








Property
and Equipment





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





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





Revenue
      and service equipment
            2-7
      yearsFurniture
      and office equipment
            4-5
      yearsBuildings
            20
      yearsLeasehold
      improvements
            Lesser
      of life of lease (including expected renewals) 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, 2008 and 2007, 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. Under Statement of Financial Accounting Standards
("SFAS") No. 142,Goodwill and
Other Intangible Assets, goodwill is not amortized but is tested for
impairment annually (or more often, if an event or circumstance indicates that
an impairment loss has been incurred). During the fourth quarter of fiscal 2008,
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, 2008





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.  The
administrative expenses associated with these reserves are expensed when
paid.





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
2008, 2007, and 2006 were $1.3 million, $1.4 million, and
$1.1 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.





Effective
July 1, 2007, we adopted FASB 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.





Accounting
for Derivatives





The
Company had no derivative financial instruments in place in fiscal 2008, 2007,
or 2006 to reduce exposure to fuel and currency price fluctuations. SFAS No.
133, Accounting for Certain
DerivativesandHedging Activities, requires that all
derivative instruments be recorded on the balance sheet at their respective fair
values.


39
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








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 123(R)"), revising SFAS No. 123, Accounting for Stock Based
Compensation; superseding Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock
Issued to Employeesand its related implementation guidance; and amending
SFAS No. 95, Statement of Cash
Flows. SFAS 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 123(R) impacted our results of operations by increasing
salaries, wages, and related expenses, increasing additional paid-in capital,
and increasing deferred income taxes. See Footnote 7 for the impact to the
Company.





Foreign
Currency Translation





Foreign
financial statements are translated into U.S. dollars in accordance with SFAS
No. 52, Foreign Currency
Translation. Assets and liabilities of the Company's foreign operations
are translated into U.S. dollars at year-end exchange rates. Income statement
accounts are translated at the average exchange rate prevailing during the year.
Resulting translation adjustments are included in other comprehensive
income.





Recent
Accounting Pronouncements





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





In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements
required under other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. It also
establishes a fair value hierarchy that prioritizes information used in
developing assumptions when pricing an asset or liability.  SFAS 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, FASB issued Staff Position No. 157-2, which provides a
one-year delayed application of SFAS 157 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The Company
must adopt these new requirements no later than its first quarter of fiscal
2010.  The Company is currently assessing the expected impact of
adopting SFAS 157 on our consolidated financial position and results of
operations when it becomes effective.





40
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








In
December 2007, FASB issued SFAS No. 141R (revised 2007),Business Combinations("SFAS 141R"), which
replaces SFAS No. 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase


accounting.
It also changes the recognition of assets acquired and liabilities assumed
arising from contingencies, requires the capitalization of in-process research
and development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS 141R is effective for us beginning July 1, 2009 and will
apply prospectively to business combinations completed on or after that
date.





In
December 2007, FASB issued SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51("SFAS 160"),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent's equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. SFAS 160 is effective for us
beginning July 1, 2009 and will apply prospectively, except for the presentation
and disclosure requirements, which will apply retrospectively. We are currently
assessing the potential impact that adoption of SFAS 160 would have on our
financial statements.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133, ("SFAS 161"). SFAS 161 requires enhanced disclosures about
an entity's derivative and hedging activities, including (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedged items are accounted for under SFAS No. 133, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is effective for
financial statements issued for fiscal years beginning after Nov. 15, 2008.
Accordingly, the Company will adopt SFAS 161 in fiscal year 2010.





(2)   
STOCK SPLITS





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





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





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





(3) ACQUISITIONS





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





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





41
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008





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





(4) PROPERTY,
EQUIPMENT, AND LEASES





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





2008
            
            
            2007Revenue
      equipment owned
            
            $
            187,416
            
            
            $
            158,924Revenue
      equipment under capital leases
            
            
            57,239
            
            
            
            57,510Furniture
      and office equipment
            
            
            4,970
            
            
            
            4,850Land
      and buildings
            
            
            17,007
            
            
            
            15,942Service
      equipment
            
            
            1,203
            
            
            
            1,123Leasehold
      improvements
            
            
            2,997
            
            
            
            2,550$
            270,832
            
            
            $
            240,898





Included
in accumulated depreciation was $6.2 million and $2.0 million in 2008
and 2007, 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 $33.3 million in
2008, $21.9 million in 2007, and $12.4 million in 2006.





(5) LEASE
OBLIGATIONS AND LONG-TERM DEBT





Lease
Obligations





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





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





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





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





Total
rental expense under operating leases was as follows for 2008, 2007, and 2006
(in thousands):





2008
            
            
            2007
            
            
            2006Revenue
      and service equipment
            
            $
            25,596
            
            
            $
            31,900
            
            
            $
            39,601Office
      facilities and terminals
            
            
            2,912
            
            
            
            3,094
            
            
            
            2,423$
            28,508
            
            
            $
            34,994
            
            
            $
            42,024





42
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008











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
              Leases2009
            
            $
            8,554
            
            
            $
            34,0092010
            
            
            8,503
            
            
            
            28,8802011
            
            
            16,819
            
            
            
            18,3692012
            
            
            18,804
            
            
            
            13,6762013
            
            
            1,804
            
            
            
            13,675Thereafter
            
            
            ----
            
            
            
            36,616Total
      minimum lease
      payments
            
            $
            54,484
            
            
            $
            145,225Less
      amounts representing
      interest
            
            
            5,913Present
      value of minimum lease
      payments
            
            $
            48,571Less
      current
      maturities
            
            
            6,454Non-current
      portion
            
            $
            42,117





The
Company is obligated for lease residual value guarantees of $67.1 million, with
$13.1 million due in fiscal 2009. 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 aboveconsist of the following
at June 30 (in thousands):





2008
            
            
            2007Outstanding
      amounts under Credit Agreement
            
            $
            43,110
            
            
            $
            18,000Other
      borrowings
            
            
            10,825
            
            
            
            21,62253,935
            
            
            
            39,622Less
      current maturities
            
            
            8,290
            
            
            
            10,736Non-current
    portion
            
            $
            45,645
            
            
            $
            28,886





Lines
of Credit





On September 26, 2005, the Company,
CTSI, and TruckersB2B entered into an unsecured Credit Agreement (the "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. The Credit Agreement was amended on
December 23, 2005, by the First Amendment to Credit Agreement, pursuant to which
CLSI was added as a borrower to the Credit Agreement. The Credit Agreement, as
amended by the Third Amendment on January 22, 2008, matures on January 23,
2013.  The Credit Agreement 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.


43
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








The
Credit Agreement has a maximum revolving borrowing limit of $70.0 million, and
the Company may increase the revolving borrowing limit by an additional $20.0
million, to a total of $90.0 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, 2008. At
June 30, 2008, $43.1 million of our credit facility was utilized as outstanding
borrowings and $4.5 million was utilized for standby letters of credit. Our
effective interest rate at June 30, 2008 was 3.67%.





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, 2008,
the interest rate charged on outstanding borrowings ranged from 5.0% to
6.1%.





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





2008
            
            $
            8,2902009
            
            
            2,1542010
            
            
            3372011
            
            
            442012
            
            
            43,110$
            53,935





(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 2008,
2007, and 2006 amounted to $268,000, $331,000, and $396,000,
respectively.





(7) STOCK
PLANS





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





In
January 2006, stockholders 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 2008, the Company granted 730,990 stock options and
59,426 restricted stock grants. In fiscal 2007, the Company granted 20,000 stock
options and 68,160 restricted stock grants. The Company is authorized to grant
an additional 245,538 shares.


44
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








The total
compensation cost that has been recorded for such stock-based awards was an
expense of $1.9 million in fiscal 2008, and $1.8 million in fiscal 2007, and
$5.1 million in fiscal 2006. The total income tax benefit recognized in the
income statement for share-based compensation arrangements was $0.7 million in
fiscal 2008, $0.8 million in fiscal 2007, and $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, 2008 and
changes during the period then ended is presented below:





Options
            
            Shares
            
            
            Weighted-Average
              Exercise
              Price
            
            
            Weighted-Average
      Remaining Contractual Term
            
            
            Aggregate
      Intrinsic
              ValueOutstanding
      at June 30, 2006
            
            
            1,446,710
            
            
            $
            7.44
            
            
            
            5.80
            
            
            $
            21,118,912Granted
            
            
            20,000
            
            
            $
            18.84
            
            
            
            ---
            
            
            
            ---Exercised
            
            
            (401,718
            )
            
            $
            2.45
            
            
            
            ---
            
            
            
            ---Outstanding
      at June 30, 2007
            
            
            1,064,992
            
            
            $
            9.54
            
            
            
            7.06
            
            
            $
            6,879,503Granted
            
            
            730,990
            
            
            $
            9.95
            
            
            
            ---
            
            
            
            ---Forfeited or
      expired
            
            
            (214,643
            )
            
            $
            15.42Exercised
            
            
            (261,441
            )
            
            $
            4.03
            
            
            
            ---
            
            
            
            ---Outstanding
      at June 30, 2008
            
            
            1,319,898
            
            
            $
            9.90
            
            
            
            7.98
            
            
            $
            1,742,049Exercisable
      at June 30, 2008
            
            
            408,992
            
            
            $
            9.67
            
            
            
            6.21
            
            
            $
            928,403





The total
intrinsic value of options exercised during fiscal 2008, 2007, and 2006 was $0.9
million, $5.3 million, and $4.1 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:




2008
            
            
            2007
            
            
            2006Weighted
      average grant date fair value
            
            $
            4.47
            
            
            $
            9.97
            
            
            $
            5.59Dividend
      yield
            
            
            0
            
            
            
            0
            
            
            
            0Expected
      volatility
            
            
            41.9
            %
            
            
            64.2
            %
            
            
            50.1
            %Risk-free
      interest rate
            
            
            3.93
            %
            
            
            4.92
            %
            
            
            4.35
            %Expected
      lives
            
            4
      years
            
            
            4
      years
            
            
            4
      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.





45
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








Restricted
Shares


Number of Shares
            
            
            Weighted
      Average Grant Date Fair
      ValueUnvested
      at June 30, 2006
            
            
            203,580
            
            
            $
            10.10Granted
            
            
            68,160
            
            
            $
            16.79Vested
            
            
            (68,558
            )
            
            $
            8.96Unvested
      at June 30, 2007
            
            
            203,182
            
            
            $
            12.73Granted
            
            
            59,426
            
            
            $
            8.82Forfeited
            
            
            (30,452
            )
            
            $
            10.83Vested
            
            
            (75,956
            )
            
            $
            11.48Unvested
      at June 30, 2008
            
            
            156,200
            
            
            $
            12.22





Restricted
shares granted to employees have been granted subject to achievement of certain
performance targets and vest 25% each year, commencing with the first
anniversary of the grant date. The weighted average grant date share prices were
$8.82, $16.79, and $12.81 in fiscal 2008, 2007, and 2006,
respectively.





As of
June 30, 2008, we had $3.1 million and $1.2 million of total unrecognized
compensation expense related to stock options and restricted stock,
respectively, that is expected to be recognized over the remaining weighted
average period of approximately 3.6 years for stock options and 2.2 years for
restricted stock.





Stock
Appreciation Rights





Number of Shares
            
            
            Weighted
      Average Grant Date Fair
      ValueUnvested
      at June 30, 2006
            
            
            571,437
            
            
            $
            7.73Paid
            
            
            (7,871
            )
            
            $
            4.48Forfeited
            
            
            (309,176
            )
            
            $
            7.10Unvested
      at June 30, 2007
            
            
            254,390
            
            
            $
            8.59Paid
            
            
            (50,064
            )
            
            $
            8.32Forfeited
            
            
            (37,124
            )
            
            $
            8.59Unvested
      at June 30, 2008
            
            
            167,202
            
            
            $
            8.68





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 $8.59 and $7.73 for
fiscal 2007 and 2006, respectively. The Company recognized a benefit of $1.0
million and $1.9 million in fiscal 2008 and 2007, respectively, for vested stock
appreciation rights.





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





46
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








Stockholder
Rights Plan





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





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





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





(8) STOCK
REPURCHASE PROGRAMS





OnOctober 24, 2007, the
Company's Board of Directors authorized a stock repurchase program pursuant to
which the Company purchased 2,000,000 shares of the Company's common stock in
open market transactions at an aggregate cost of approximately $13.8 million.
OnDecember 5,
2007, the Company's Board of Directors authorized an additional stock repurchase
program pursuant to which the Company may purchase up to 2,000,000 additional
shares of the Company's common stock in open market transactions through
December 3, 2008. We intend to hold repurchased shares in treasury for general
corporate purposes, including issuances under stock option plans.  We
account for treasury stock using the cost method.





(9) EARNINGS
PER SHARE





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





2008
            
            
            2007
            
            
            2006Net
      income
            
            $
            6,536
            
            
            $
            22,252
            
            
            $
            20,548Basic
      earnings per share:Weighted - average number of
      common
              shares
    outstanding
            
            
            22,378
            
            
            
            23,252
            
            
            
            22,828Basic earnings per
      share
            
            $
            0.29
            
            
            $
            0.96
            
            
            $
            0.90Diluted
      earnings per share:Weighted - average number of
      common
              shares
    outstanding
            
            
            22,378
            
            
            
            23,252
            
            
            
            22,828Effect of stock options and
      other incremental shares
            
            
            239
            
            
            
            446
            
            
            
            558Weighted-average number of
      common shares
              outstanding -
      diluted
            
            
            22,617
            
            
            
            23,698
            
            
            
            23,386Diluted earnings per
      share
            
            $
            0.29
            
            
            $
            0.94
            
            
            $
            0.88





The
Company has 1,182,903 options that could potentially dilute basic earnings
per share that were excluded from the EPS calculation as they are
antidilutive in the current year.


47
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








(10) COMMITMENTS
AND CONTINGENCIES





The
Company has outstanding commitments to purchase approximately $186.4 million of
revenue equipment at June 30, 2008.





Standby
letters of credit, not reflected in the accompanying consolidated financial
statements, aggregated approximately $4.5 million at June 30,
2008.





The
Company has employment and consulting agreements with various key employees
providing for minimum combined annual compensation of $655,000 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.




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







(11) RELATED
PARTY TRANSACTIONS





Since
August 2007, the Company has used rent-free, an approximately nine acre parcel
of land located on Interstate 37 near Indianapolis, Indiana, to evaluate the
prospects for operating a used-equipment business to dispose of a portion of its
own tractors and trailers in the ordinary course of business.  The
Company intends to continue the equipment sales business and found the location
to be favorable.  The land was owned by Will LLC, and Indiana Limited
Liability Company owned and managed by Mrs. Will, the wife of Paul Will, the
Company's Vice Chairman of the Board, Executive Vice President, Chief Financial
Officer, Treasurer, and Assistant Secretary ("Will LLC").  On June 20,
2008, the Company purchased the parcel from Will LLC at a cost of $97,500 per
acre, or a total of $821,222.  Prior to entry into the purchase
agreement with the Company, Will LLC had received written offers to purchase the
parcel from independent third parties at prices of $95,000 and $100,000 per
acre, respectively.  Mrs. Will, as the sole member of Will LLC, had a
financial interest in the transaction equal to the total purchase
price.  The transaction was reviewed and approved in advance by the
Company's Audit and Corporate Governance Committee of the Board of
Directors.


48
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








(12) INCOME
TAXES





The
income tax provision for operations in 2008, 2007, and 2006 consisted of the
following (in thousands):





2008
            
            
            2007
            
            
            2006Current:Federal
            
            $
            (2,246
            )
            
            $
            3,509
            
            
            $
            9,812State and
local
            
            
            (462
            )
            
            
            1,181
            
            
            
            1,262Foreign
            
            
            (311
            )
            
            
            (773
            )
            
            
            (225
            )Total Current
            
            
            (3,019
            )
            
            
            3,917
            
            
            
            10,849Deferred:Federal
            
            
            9,440
            
            
            
            9,593
            
            
            
            1,869State and
local
            
            
            1,788
            
            
            
            524
            
            
            
            210Foreign
            
            
            (1,062
            )
            
            
            194
            
            
            
            (62
            )Total Deferred
            
            
            10,166
            
            
            
            10,311
            
            
            
            2,017Total
            
            $
            7,147
            
            
            $
            14,228
            
            
            $
            12,866





No
benefit has been recognized for U.S. federal income taxes on undistributed
losses of foreign subsidiaries of approximately $2.5 million at June 30,
2008.  Included in the consolidated income before income taxes is a
loss of approximately $3.9 million from foreign operations in fiscal
2008.





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





2008
            
            
            2007
            
            
            2006Computed
      "expected" income tax expense
            
            $
            4,792
            
            
            $
            12,768
            
            
            $
            11,695State
      taxes, net of federal benefit
            
            
            862
            
            
            
            1,108
            
            
            
            957Non-deductible
      expenses
            
            
            1,398
            
            
            
            1,368
            
            
            
            922Other,
      net
            
            
            95
            
            
            
            (1,016
            )
            
            
            (708
            )Actual income tax
      expense
            
            $
            7,147
            
            
            $
            14,228
            
            
            $
            12,866





49
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








The tax
effect of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at June 30, 2008 and 2007 consisted of the
following (in thousands):





2008
            
            
            2007Deferred
      tax assets:Deferred equity
      compensation
            
            $
            1,157
            
            
            $
            1,271Insurance
    reserves
            
            
            3,857
            
            
            
            2,491Other
            
            
            3,362
            
            
            
            3,188Total deferred tax
      assets
            
            $
            8,376
            
            
            $
            6,950Deferred
      tax liabilities:Property and
      equipment
            
            $
            (29,680
            )
            
            $
            (19,735
            )Goodwill
            
            
            (3,258
            )
            
            
            (2,895
            )Capital leases
            
            
            (2,322
            )
            
            
            (1,498
            )Other
            
            
            (1,593
            )
            
            
            (1,133
            )Total deferred tax
      liabilities
            
            $
            (36,853
            )
            
            $
            (25,261
            )Net
      current deferred tax assets
            
            $
            3,035
            
            
            $
            2,021Net
      non-current deferred tax liabilities
            
            
            (31,512
            )
            
            
            (20,332
            )Total net deferred tax
      liabilities
            
            $
            (28,477
            )
            
            $
            (18,311
            )





As of
June 30, 2008, the Company had operating loss carry-forwards for Income Tax
Purposes of $9.4 million, which have expiration dates of 2014 and
after.





Effective
July 1, 2007, we adopted FIN 48, which 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.  As of
June 30, 2008 the Company recorded a $0.8 million liability for unrecognized tax
benefits, a portion of which represents penalties and interest.








50
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








(13) SEGMENT
INFORMATION AND SIGNIFICANT CUSTOMERS





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





Fiscal
      year ended
              June
      30,
              (Dollars
      in thousands)2008
            
            
            2007
            
            
            2006Total
      revenuesTransportation
            
            $
            556,571
            
            
            $
            492,692
            
            
            $
            471,872E-Commerce
            
            
            9,324
            
            
            
            10,000
            
            
            
            8,322565,895
            
            
            
            502,692
            
            
            
            480,194Operating
      incomeTransportation
            
            
            17,363
            
            
            
            38,539
            
            
            
            32,708E-Commerce
            
            
            1,435
            
            
            
            1,561
            
            
            
            1,52018,798
            
            
            
            40,100
            
            
            
            34,228Depreciation
      and amortizationTransportation
            
            
            33,247
            
            
            
            21,862
            
            
            
            12,428E-Commerce
            
            
            17
            
            
            
            18
            
            
            
            1433,264
            
            
            
            21,880
            
            
            
            12,442Interest
      incomeTransportation
            
            
            (106
            )
            
            
            (21
            )
            
            
            (153
            )Interest
      expenseTransportation
            
            
            5,028
            
            
            
            3,532
            
            
            
            888E-Commerce
            
            
            ---
            
            
            
            ---
            
            
            
            455,028
            
            
            
            3,532
            
            
            
            933Income
      before taxesTransportation
            
            
            12,059
            
            
            
            34,882
            
            
            
            31,939E-Commerce
            
            
            1,624
            
            
            
            1,599
            
            
            
            1,47513,683
            
            
            
            36,481
            
            
            
            33,414GoodwillTransportation
            
            
            16,702
            
            
            
            16,702
            
            
            
            16,702E-Commerce
            
            
            2,435
            
            
            
            2,435
            
            
            
            2,43519,137
            
            
            
            19,137
            
            
            
            19,137Total
      assetsTransportation
            
            
            322,080
            
            
            
            301,286
            
            
            
            186,165E-Commerce
            
            
            7,255
            
            
            
            5,627
            
            
            
            3,901329,335
            
            
            
            306,913
            
            
            
            190,066





51
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008








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.





2008
            
            
            2007
            
            
            2006Total
      revenue:United States
            
            $
            477,830
            
            
            $
            414,360
            
            
            $
            393,090Canada
            
            
            56,320
            
            
            
            58,790
            
            
            
            59,666Mexico
            
            
            31,745
            
            
            
            29,542
            
            
            
            27,438Total
            
            $
            565,895
            
            
            $
            502,692
            
            
            $
            480,194Long
      lived assets:United States
            
            $
            203,728
            
            
            $
            198,886
            
            
            $
            101,911Canada
            
            
            11,753
            
            
            
            9,211
            
            
            
            4,719Mexico
            
            
            12,673
            
            
            
            9,910
            
            
            
            6,348Total
            
            $
            228,154
            
            
            $
            218,007
            
            
            $
            112,978





No
customer accounted for more than 5% of the Company's total revenue during any of
its three most recent fiscal years.





(14) SELECTED
QUARTERLY DATA (Unaudited)





Summarized
quarterly data for fiscal 2008 and 2007 follows (in thousands except per share
amounts):





Fiscal
      Year 20081stQtr.
            
            
            2ndQtr.
            
            
            3rdQtr.
            
            
            4thQtr.Total
      revenues
            
            $
            133,779
            
            
            $
            138,609
            
            
            $
            138,890
            
            
            $
            154,618Operating
      expenses
            
            
            127,828
            
            
            
            133,760
            
            
            
            136,564
            
            
            
            148,947Operating
      income
            
            
            5,951
            
            
            
            4,849
            
            
            
            2,326
            
            
            
            5,671Other
      expense, net
            
            
            1,339
            
            
            
            1,256
            
            
            
            1,231
            
            
            
            1,288Income
      before taxes
            
            
            4,612
            
            
            
            3,593
            
            
            
            1,095
            
            
            
            4,383Income
      tax expense
            
            
            2,111
            
            
            
            1,870
            
            
            
            946
            
            
            
            2,220Net income
            
            $
            2,501
            
            
            $
            1,723
            
            
            $
            149
            
            
            $
            2,163Basic
      income per share
            
            $
            0.11
            
            
            $
            0.08
            
            
            $
            0.01
            
            
            $
            0.10Diluted
      income per share
            
            $
            0.11
            
            
            $
            0.08
            
            
            $
            0.01
            
            
            $
            0.10





52
 TABLE OF CONTENTS


CELADON
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2008











Fiscal
      Year 20071stQtr.
            
            
            2ndQtr.
            
            
            3rdQtr.
            
            
            4thQtr.Total
      revenues
            
            $
            127,728
            
            
            $
            122,870
            
            
            $
            120,400
            
            
            $
            131,694Operating
      expenses
            
            
            116,087
            
            
            
            111,893
            
            
            
            112,780
            
            
            
            121,832Operating
      income
            
            
            11,641
            
            
            
            10,977
            
            
            
            7,620
            
            
            
            9,862Other
      expense, net
            
            
            279
            
            
            
            773
            
            
            
            1,030
            
            
            
            1,538Income
      before taxes
            
            
            11,362
            
            
            
            10,204
            
            
            
            6,590
            
            
            
            8,324Income
      tax expense
            
            
            4,249
            
            
            
            4,139
            
            
            
            2,660
            
            
            
            3,180Net income
            
            $
            7,113
            
            
            $
            6,065
            
            
            $
            3,930
            
            
            $
            5,144Basic
      income per share
            
            $
            0.31
            
            
            $
            0.26
            
            
            $
            0.17
            
            
            $
            0.22Diluted
      income per share
            
            $
            0.30
            
            
            $
            0.26
            
            
            $
            0.17
            
            
            $
            0.22





53
 TABLE OF CONTENTS


SCHEDULE I





CELADON
GROUP, INC.


VALUATION
AND QUALIFYING ACCOUNTS





Years
ended June 30, 2008, 2007, and 2006





Description
            
            Balance
      at
              Beginning
              of Period
            
            
            Charged
      to
              Costs
      and
              Expenses
            
            
            Deductions
            
            
            Balance
      at
              End
      of
              PeriodYear
      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)
            
            $
            7,732,545Year
      ended June 30, 2007:Allowance
      for doubtful accounts
            
            $
            1,268,925
            
            
            $
            366,099
            
            
            $
            458,693
            (a)
            
            $
            1,176,331Reserves
      for claims payable as self insurer
            
            $
            7,732,545
            
            
            $
            9,097,620
            
            
            $
            9,708,932
            (b)
            
            $
            7,121,233Year
      ended June 30, 2008:Allowance
      for doubtful accounts
            
            $
            1,176,331
            
            
            $
            910,719
            
            
            $
            892,965
            (a)
            
            $
            1,194,085Reserves
      for claims payable as self insurer
            
            $
            7,121,233
            
            
            $
            13,198,369
            
            
            $
            10,196,906
            (b)
            
            $
            10,122,696











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








54
 TABLE OF CONTENTS


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





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





Item 9A. Controls
and Procedures





Evaluation
of Disclosure Controls and Procedures





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





Based on
their evaluation as of June 30, 2008, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
are effective to ensure that the information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC
rules and forms.





Management's
Report on Internal Control Over Financial Reporting





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





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





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





Management
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2008. 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, 2008, our internal
control over financial reporting is effective based on those
criteria.








55
 TABLE OF CONTENTS


Design
and Changes in Internal Control over Financial Reporting





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





There
were no changes in our internal control over financial reporting that occurred
during the quarter ended June 30, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Item 9B.  Other
Information.





Not
applicable.






56
 TABLE OF CONTENTS




PART
III





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





Item 10.  Directors and
Executive Officers of the Registrant





The
information required by this Item, with the exception of the Code of Ethics
disclosure below, is incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with the 2008 Annual Meeting of
Stockholders.





Code
of Ethics





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





Item 11.  Executive
Compensation





The
information required by this Item is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with the 2008 Annual
Meeting of Stockholders.





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





The
information required by this Item, is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with the 2008 Annual
Meeting of Stockholders. The following table provides certain information as of
June 30, 2008, 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,
2008:








Plan Category
            
            (a)
              Number
      of securities
              to
      be issued
              upon
      exercise
              of
      outstanding options,
              warrants and rights
            
            (b)
              Weighted-average
              price
      of
              outstanding
      options,
              warrants and rights
            
            (c)
              Number
      of securities
              remaining
      available
              for future issuanceEquity
      compensation plans
              approved
      by security holders
            
            1,333,505
            
            $9.90
            
            245,538Equity
      compensation plans
              not
      approved by security holders
            
            Not
      applicable
            
            Not
      applicable
            
            Not
      applicable





57
 TABLE OF CONTENTS


Item 13.  Certain Relationships
and Related Transactions





The
information required by this Item is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with the 2008 Annual
Meeting of Stockholders.





Item 14.  Principal Accounting
Fees and Services





The
information required by this Item is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with the 2008 Annual
Meeting of Stockholders.





58
 TABLE OF CONTENTS


PART
IV





Item 15.  Exhibits, Financial
Statement Schedule





Page
      Number of
              Annual
      Report
              on
      Form 10-K(a)           List
      of Documents filed as part of this Report(1)           Financial
      StatementsReport of Independent Registered
      Public Accounting Firm - KPMG 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 ScheduleSchedule I - Valuation and
      Qualifying Accounts
            54





59
 TABLE OF CONTENTS


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


3.1
            Amended
      and Restated Certificate of Incorporation of the Company. (Incorporated by
      reference to the Company's Quarterly Report on Form 10-Q for the quarterly
      period ending December 31, 2005, filed with the SEC on January 30,
      2006.)3.2
            Certificate
      of Designation for Series A Junior Participating Preferred Stock.
      (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report
      on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC
      on September 28, 2000.)3.3
            Amended
      and Restated By-laws of the Company.  (Incorporated by reference
      to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed with
      the SEC on January 31, 2008.)4.1
            Amended
      and Restated Certificate of Incorporation of the Company. (Incorporated by
      reference to the Company's Quarterly Report on Form 10-Q for the quarterly
      period ending December 31, 2005, filed with the SEC on January 30,
      2006.)4.2
            Certificate
      of Designation for Series A Junior Participating Preferred Stock.
      (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report
      on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC
      on September 28, 2000.)4.3
            Rights
      Agreement, dated as of July 20, 2000, between Celadon Group, Inc. and
      Fleet National Bank, as Rights Agent. (Incorporated by reference to
      Exhibit 4.1 to the Company's Registration Statement on Form 8-A,
      filed with the SEC on July 20, 2000.)4.4
            Amended
      and Restated By-laws of the Company.  (Incorporated by reference
      to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed with
      the SEC on January 31, 2008.)10.1
            Celadon
      Group, Inc. 1994 Stock Option Plan. (Incorporated by reference to Exhibit
      B to the Company's Proxy Statement on Schedule 14A, filed with the SEC
      October 17, 1997.) *10.2
            Employment
      Contract dated January 21, 1994 between the Company and Stephen Russell.
      (Incorporated by reference to Exhibit 10.43 to the Company's Registration
      Statement on Form S-1, Registration No. 33-72128, filed with the SEC on
      November 24, 1993.) *10.3
            Amendment
      dated February 12, 1997 to Employment Contract dated January 21, 1994
      between the Company and Stephen Russell. (Incorporated by reference to
      Exhibit 10.50 to the Company's Annual Report on Form 10-K filed with the
      SEC on September 12, 1997.) *10.4
            Celadon
      Group, Inc. Non-Employee Director Stock Option Plan. (Incorporated by
      reference to Exhibit A to the Company's Proxy Statement on Schedule 14A,
      filed with the SEC on October 14, 1997.) *10.5
            Amendment
      No. 2 dated August 1, 1997 to Employment Contract dated January 21, 1994
      between the Company and Stephen Russell. (Incorporated by reference to
      Exhibit 10.54 to the Company's Quarterly Report on Form 10-Q filed with
      the SEC on February 11, 1998.) *10.6
            Rights
      Agreement, dated as of July 20, 2000, between Celadon Group, Inc. and
      Fleet National Bank, as Rights Agent. (Incorporated by reference to
      Exhibit 4.1 to the Company's Registration Statement on Form 8-A, filed
      with the SEC on July 20, 2000.)10.7
            Amendment
      No. 3 dated July 26, 2000 to Employment Contract dated January 21, 1994
      between the Company and Stephen Russell. (Incorporated by reference to
      Exhibit 10.19 to the Company's Annual Report on Form 10-K filed with the
      SEC on September 30, 2002.) *10.8
            Amendment
      No. 4 dated April 4, 2002 to Employment Contract dated January 21, 1994
      between the Company and Stephen Russell. (Incorporated by reference to
      Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the
      SEC on September 30, 2002.) *10.9
            Separation
      Agreement dated March 3, 2000 between the Company and Paul A. Will.
      (Incorporated by reference to Exhibit 10.21 to the Company's Annual Report
      on Form 10-K filed with the SEC on September 30, 2002.)
  *10.10
            Amendment
      dated September 30, 2001 to Separation Agreement between the Company and
      Paul A. Will dated March 3, 2000. (Incorporated by reference to Exhibit
      10.22 to the Company's Annual Report on Form 10-K filed with the SEC on
      September 30, 2002.) *10.11
            Amendment
      No. 5 dated November 20, 2002 to Employment Contract dated January 21,
      1994 between the Company and Stephen Russell. (Incorporated by reference
      to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed with
      the SEC on September 19, 2003.) *10.12
            Credit
      Agreement dated as of September 26, 2005 among the Company, certain of its
      subsidiaries, LaSalle Bank National Association, and certain other
      lenders. (Incorporated by reference to Exhibit 10.1 to the Company's
      Current Report on Form 8-K filed with the SEC on September 30,
      2005.)10.13
            Stock
      Appreciation Rights Plan effective April 4, 2002. (Incorporated by
      reference to Exhibit 10.23 to the Company's Quarterly Report on Form
      10-K/A filed with the SEC on October 28, 2005.) *10.14
            Celadon
      Group, Inc., 2006 Omnibus Incentive Plan. (Incorporated by reference to
      Appendix B to the Company's definitive proxy statement, filed with the SEC
      on December 19, 2005.) *


60
 TABLE OF CONTENTS





10.15
            First
      Amendment to Credit Agreement dated December 23, 2005, among the Company,
      certain of it subsidiaries, LaSalle Bank National Association, and certain
      other lenders. (Incorporated by reference to Exhibit 10.21 to the
      Company's Quarterly Report on Form 10-Q filed with the SEC on January 30,
      2006.)10.16
            Celadon
      Group, Inc. Form of Award Notice for Employees for Restricted Stock
      Awards. (Incorporated by reference to Exhibit 10.23 to the Company's
      Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
      *10.17
            Celadon
      Group, Inc. Form of Award Notice for Stephen Russell for Restricted Stock
      Award. (Incorporated by reference to Exhibit 10.24 to the Company's
      Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
      *10.18
            Celadon
      Group, Inc. Form of Award Notice for Employees for Incentive Stock Option
      Grants. (Incorporated by reference to Exhibit 10.25 to the Company's
      Quarterly Report on Form 10-Q filed with the SEC on May 4, 2006.)
      *10.19
            Celadon
      Group, Inc. Form of Award Notice for Non-Employee Directors for
      Non-Qualified Stock Option Grants. (Incorporated by reference to Exhibit
      10.26 to the Company's Quarterly Report on Form 10-Q filed with the SEC on
      May 4, 2006.) *10.20
            Asset
      Purchase Agreement dated October 6, 2006 by and among Erin Truckways, Ltd.
      d/b/a Digby Truckline, Inc., Cynthia J. Bedore, and Celadon Trucking
      Services, Inc.  (Incorporated by reference to Exhibit 10.21 to
      the Company's Quarterly Report on Form 10-Q filed with the SEC on February
      5, 2007.)10.21
            Separation
      Agreement, General Release, Consulting Agreement and Non-Competition,
      Non-Disclosure, and Non-Solicitation Agreement dated July 25, 2007 by and
      between Celadon Trucking Services, Inc. and Thomas
      Glaser.  (Incorporated by reference to Exhibit 10.21 to the
      Company's Quarterly Report on Form 10-Q filed with the SEC on October 31,
      2007.) *10.22
            Employment
      Letter dated August 8, 2007 by and between Celadon Group, Inc. and Chris
      Hines.  (Incorporated by reference to Exhibit 10.22 to the
      Company's Quarterly Report on Form 10-Q filed with the SEC on October 31,
      2007.) *10.23
            Second
      Amendment to Credit Agreement dated June 30, 2007 by and among Celadon
      Group, Inc., Celadon Trucking Services, Inc., Truckers B2B, Inc., and
      Celadon Logistics Services, Inc., the financial institutions party
      thereto, and LaSalle Bank National Association.  (Incorporated
      by reference to Exhibit 10.23 to the Company's Quarterly Report on Form
      10-Q filed with the SEC on January 31, 2008.)10.24
            Third
      Amendment to Credit Agreement dated January 22, 2008 by and among Celadon
      Group, Inc., Celadon Trucking Services, Inc., Truckers B2B, Inc., and
      Celadon Logistics Services, Inc., the financial institutions party
      thereto, and LaSalle Bank National Association.  (Incorporated
      by reference to Exhibit 10.23 to the Company's Quarterly Report on Form
      10-Q filed with the SEC on May 1, 2008.)10.25
            Amendment
      to Separation Agreement, General Release, Consulting Agreement, and
      Non-Competition, Non-Disclosure, and Non-Solicitation Agreement dated
      October 17, 2007 by and between Celadon Trucking Services, Inc. and Thomas
      Glaser.  (Incorporated by reference to Exhibit 10.1 to the
      Company's Current Report on Form 8-K filed with the SEC on April 30,
      2008.) *10.26
            General
      and Mutual Release dated April 24, 2008 by and between Celadon Trucking
      Services, Inc. and its affiliates and subsidiaries and Thomas
      Glaser.  (Incorporated by reference to Exhibit 10.2 to the
      Company's Current Report on Form 8-K filed with the SEC on April 30,
      2008.) *14
            Celadon
      Group, Inc. Code of Business Conduct and Ethics adopted by the Company on
      April 30, 2003. (Incorporated by reference to Exhibit 10.20 to the
      Company's Annual Report on Form 10-K filed with the SEC on September 19,
      2003.)21
            Subsidiaries.
      #23.1
            Consent
      of Independent Registered Public Accounting Firm - KPMG LLP.
    #31.1
            Certification
      pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the
      Company's Chief Executive Officer. #31.2
            Certification
      pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002, by Paul A. Will, the
      Company's Chief Financial Officer. #32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company's Chief
      Executive Officer. #32.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, by Paul A. Will, the Company's Chief
      Financial Officer. #


______________________




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








61
 TABLE OF CONTENTS


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this August 28, 2008.





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











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





Signature
            
            Title
            
            Date/s/
      Stephen Russell
            
            Chairman
      of the Board and
            
            August
      28, 2008Stephen
      Russell
            
            Chief
      Executive Officer
              (Principal
      Executive Officer)/s/
      Paul A. Will
            
            Vice
      Chairman of the Board, Chief
              Financial
      Officer, Treasurer, and
            
            August
      28, 2008Paul
      A. Will
            
            Asst.
      Secretary (Principal Financial and
              Accounting
      Officer)/s/
      Michael Miller
            
            Director
            
            August
      28, 2008Michael
      Miller/s/
      Anthony Heyworth
            
            Director
            
            August
      28, 2008Anthony
      Heyworth/s/
      Cathy Langham
            
            Director
            
            August
      28, 2008Cathy
      Langham