Disclosure Regarding Forward Looking Statements

This Quarterly Report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements 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 in or implied by such forward-looking statements. Such statements may be identified by the fact that they do not relate strictly to historical or current facts. These statements generally use words such as "believe," "expect," "anticipate," "project," "forecast," "should," "estimate," "plan," "outlook," "goal," and similar expressions. While it is impossible to identify all factors that may cause actual results to differ from those expressed in or implied by forward-looking statements, the risks and uncertainties that may affect the Company's business, include, but are not limited to, those discussed in the section entitled Item 1A. Risk Factors set forth below.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. 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 the events, conditions, or circumstances on which any such statement is based.

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

Business Overview

We are one of North America's twenty 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 many Fortune 500 shippers.

In our international operations, we offer time-sensitive transportation in and between the United States and two of its 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. The additional complexity of and need to establish cross-border business partners and to develop strong organization and adequate infrastructure in Mexico affords some barriers to competition that are not present in traditional U.S. truckload services.

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.

In addition to our international business, we offer a broad range of truckload transportation services within the United States, including long-haul, regional, dedicated, intermodal, and logistics. With six different asset-based acquisitions from 2003 to 2008, 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, a profitable marketing business that affords volume purchasing power for items such as fuel, tires, and equipment to approximately 21,000 trucking fleets representing approximately 470,000 tractors. TruckersB2B represents a separate operating segment under generally accepted accounting principles.

Recent Results and Financial Condition

For the second quarter of fiscal 2009, operating revenue decreased 13.7% to $119.6 million, compared with $138.6 million for the second quarter of fiscal 2008. Excluding fuel surcharge, operating revenue decreased 14.0% to $98.5 million for the second quarter of fiscal 2009, compared with $114.5 million for the second quarter of fiscal 2008. Net income was unchanged at $1.7 million in both the 2009 and 2008 quarters. Earnings per diluted share were unchanged at $0.08 in both the 2009 and 2008 quarters. We believe that a weakened freight market and weakened economy in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 resulted in our revenue reductions. This was partially offset by a decrease in fuel prices and reduction in capacity in the truckload industry.

At December 31, 2008, our total balance sheet debt (including capital lease obligations less cash) was $84.2 million, and our total stockholders' equity was $143.8 million. At December 31, 2008, our debt to capitalization ratio was 37.5%. At December 31, 2008, we had $32.3 million of available borrowing capacity under our revolving credit facility.

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, brokerage, other trucking related services, and from TruckersB2B. We believe that eliminating the impact of the sometimes volatile fuel surcharge revenue affords a more consistent basis for comparing our results of operations from period to period. 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.

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. Other mostly fixed costs include our non-driver personnel and facilities expenses. In discussing our expenses as a percentage of revenue, we sometimes discuss changes as a percentage of revenue before fuel surcharges, in addition to absolute dollar changes, because we believe the high variable cost nature of our business makes a comparison of changes in expenses as a percentage of revenue more meaningful at times than absolute dollar changes.

The trucking industry has experienced significant increases in expenses over the past three years, in particular those relating to equipment costs, driver compensation, insurance, and fuel. Until recently many trucking companies had been able to raise freight rates to cover the increased costs based primarily on an industry-wide tight capacity of drivers. As freight demand has softened, carriers have been willing to accept rate decreases to utilize assets in service.

Revenue Equipment and Related Financing

For the remainder of fiscal 2009, we expect to obtain tractors primarily for
replacement, and we expect to maintain the average age of our tractor fleet at
approximately 1.7 years and the average age of our trailer fleet at
approximately 4.0 years. At December 31, 2008, we had future operating lease
obligations totaling $174.0 million, including residual value guarantees of
approximately $83.1 million.


                                      December 31, 2008            December 31, 2007
                                   Tractors      Trailers       Tractors       Trailers
      Owned equipment                  1,737         3,251          1,328          2,488
      Capital leased equipment           ---         3,723            ---          3,738
      Operating leased equipment       1,166         3,101          1,218          2,622
      Independent contractors            206           ---            370            ---
      Total                            3,109        10,075          2,916          8,848

Independent contractors are utilized through a contract with us to supply one or more tractors and drivers for our use. Independent contractors must pay their own tractor expenses, fuel, maintenance, and driver costs and must meet our specified guidelines with respect to safety. A lease-purchase program that we offer provides independent contractors the opportunity to lease-to-own a tractor from a third party. As of December 31, 2008, there were 206 independent contractors providing a combined 6.6% of our tractor capacity.

Outlook

Looking forward, our profitability goal is to achieve an operating ratio of approximately 90%. We expect this to require improvements in rate per mile and miles per tractor and decreased non-revenue miles. Because a large percentage of our costs are variable, changes in revenue per mile affect our profitability to a greater extent than changes in miles per tractor. For the remainder of fiscal 2009, the key factors that we expect to have the greatest effect on our profitability are our freight revenue per tractor per week (which will be affected by the general freight environment, including the balance of freight demand and industry-wide trucking capacity), 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. Operationally, we will seek improvements in safety, driver recruiting, and retention. Our success in these areas primarily will affect revenue, driver-related expenses, and insurance and claims expense. Given the difficult freight market confronting our industry, we believe achieving our profitability goal during fiscal 2009 is unlikely, although we continue to strive toward that goal.

Results of Operations

The following table sets forth the percentage relationship of expense items to
freight revenue for the periods indicated:

                                                  For the three months ended            For the six months ended
                                                         December 31,                         December 31,
                                                   2008                2007                2008              2007
Freight
revenue(1)                                             100.0 %             100.0 %          100.0 %            100.0 %

Operating expenses:
Salaries, wages, and employee benefits                  38.4 %              33.9 %           38.1 %             33.8 %
Fuel(1)                                                  8.9 %              11.7 %            9.3 %             11.8 %
Operations and
maintenance                                              9.0 %               8.0 %            8.8 %              7.7 %
Insurance and
claims                                                   3.3 %               3.9 %            3.3 %              3.5 %
Depreciation and
amortization                                             8.8 %               6.6 %            8.0 %              6.8 %
Revenue equipment
rentals                                                  7.1 %               5.8 %            6.3 %              6.0 %
Purchased
transportation                                          12.9 %              18.9 %           13.7 %             19.1 %
Costs of products and services sold                      1.6 %               1.5 %            1.5 %              1.5 %
Communications and
utilities                                                1.1 %               1.1 %            1.1 %              1.1 %
Operating taxes and
licenses                                                 2.4 %               2.0 %            2.3 %              1.9 %
General and other
operating                                                2.1 %               2.4 %            2.2 %              2.1 %

Total operating
expenses                                                95.6 %              95.8 %           94.6 %             95.3 %

Operating
income                                                   4.4 %               4.2 %            5.4 %              4.7 %

Other expense:
Interest
expense                                                  1.0 %               1.1 %            1.0 %              1.1 %

Income before income
taxes                                                    3.4 %               3.1 %            4.4 %              3.6 %
Provision for income
taxes                                                    1.7 %               1.6 %            2.3 %              1.8 %

Net income                                               1.7 %               1.5 %            2.1 %              1.8 %

(1) Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. Fuel surcharges were $21.1 million and $24.1 million for the second quarter of fiscal 2009 and 2008, respectively, and $58.7 million and $44.0 million for the six months ended December 31, 2008 and 2007, respectively.

Comparison of Three Months Ended December 31, 2008 to Three Months Ended December 31, 2007

Operating revenue decreased by $19.0 million, or 13.7%, to $119.6 million for the second quarter of fiscal 2009, from $138.6 million for the second quarter of fiscal 2008. Going forward, we expect the addition of Continental's assets and intermodal operations to have some affect on our operating revenue. However, for the foreseeable future we don't expect incremental growth in our fleet size following the Continental acquisition.

Freight revenue decreased by $16.0 million, or 14.0%, to $98.5 million for the second quarter of fiscal 2009, from $114.5 million for the second quarter of fiscal 2008. This decrease was primarily attributable to a decrease in freight demand. Freight from Mexico into the U.S. declined dramatically, causing us to reduce the number of trucks we put into Mexico. Domestic freight levels were also down significantly. Accordingly, billed miles decreased to 55.7 million for the second quarter of fiscal 2009, from 63.4 million for the second quarter of fiscal 2008, and average miles per tractor per week decreased from 2,023 miles to 1,762 miles. Other factors included an increase in non-revenue miles from 10.3% to 11.9% of total miles, and a slight reduction in average freight revenue per loaded mile to $1.49 from $1.50 for the second quarters of fiscal 2009 and 2008, respectively. As the economy and freight market weakened, we took on additional broker freight, at lower rates, to fill the resulting void. This led to an increase in non-revenue miles as we repositioned tractors for the next load. Average revenue per tractor per week, net of fuel surcharge, which is our primary measure of asset productivity, decreased 15.3% to $2,306 in the second quarter of fiscal 2009, from $2,721 for the second quarter of fiscal 2008.

Revenue for TruckersB2B was $2.3 million in the second quarter of fiscal 2009, compared to $2.4 million for the second quarter of fiscal 2008. The decrease was primarily related to a decrease in fuel rebates due to lower general freight demand. To the extent small and mid size carriers continue to be affected adversely by lagging freight demand, limited financing availability, and licensing, insurance, and other costs, we anticipate the revenue for TruckersB2B to be negatively impacted as well.

Salaries, wages, and employee benefits were $37.8 million, or 38.4% of freight revenue, for the second quarter of fiscal 2009, compared to $38.8 million, or 33.9% of freight revenue, for the second quarter of fiscal 2008. The dollar decrease in salaries, wages, and benefits is largely due to decreased driver payroll related to decreased miles. Additionally, decreases in administrative payroll resulting from a strategic corporate plan to consolidate and/or eliminate several functions into Indianapolis from various terminals, which plan reduced our non-driver administrative workforce by approximately 5%, also decreased our salaries, wages, and benefits. Also a factor was the decrease in the value of stock appreciation rights, which was due, in large part, to a reduction in stock prices caused by the lagging economy. However, these factors were largely offset by reduced freight revenue resulting in an increase in salaries, wages, and employee benefits as a percentage of freight revenue.

Fuel expenses, net of fuel surcharge revenue of $21.1 million and $24.1 million for the second quarter of fiscal 2009 and 2008, respectively, decreased to $8.8 million, or 8.9% of freight revenue, for the second quarter of fiscal 2009, compared to $13.4 million, or 11.7% of freight revenue, for the second quarter of fiscal 2008. These decreases were attributable to a 17.0% decrease in average fuel prices to $2.58 per gallon in the second quarter of fiscal 2009, from $3.11 per gallon in the second quarter of fiscal 2008, and a decrease in the gallons purchased due to fewer miles driven and increased miles per gallon related to reducing idling and more efficient tractors.

Operations and maintenance expense decreased to $8.8 million, or 9.0% of freight revenue, for the second quarter of fiscal 2009, from $9.2 million, or 8.0% of freight revenue, for the second quarter of fiscal 2008. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. These decreases in the second quarter of fiscal 2009 are primarily related to a decrease in costs associated with physical damage expense, due to fewer accidents in the second quarter of fiscal 2009.

Insurance and claims expense decreased to $3.3 million, or 3.3% of freight revenue, for the second quarter of fiscal 2009, from $4.5 million, or 3.9% of freight revenue, for the second quarter of fiscal 2008. Insurance consists of premiums for liability, physical damage, cargo damage, and workers compensation insurance, in addition to claims expense. These decreases resulted from decreases in our worker's compensation expense and cargo claims expense, related to the decreased number of claims and severity of those claims in the quarter, and a decrease in other insurance expense. 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. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. Insurance and claims expense will vary based primarily on the frequency and severity of claims, the level of self-retention, and the premium expense.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased to $8.6 million, or 8.8% of freight revenue, for the second quarter of fiscal 2009, compared to $7.6 million, or 6.6% of freight revenue, for the second quarter of fiscal 2008. These increases are primarily related to the net addition of approximately 400 owned tractors, which has increased our tractor depreciation. These increases were partially offset by gains on sales of equipment in the quarter. 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.

Revenue equipment rentals increased to $7.0 million, or 7.1% of freight revenue, for the second quarter of fiscal 2009, compared to $6.7 million or 5.8% of freight revenue for the second quarter of fiscal 2008. The majority of these increases are related to the net addition of approximately 480 trailers under operating lease, which has increased our trailer rents.

Purchased transportation decreased significantly to $12.8 million, or 12.9% of freight revenue, for the second quarter of fiscal 2009, from $21.6 million, or 18.9% of freight revenue, for the second quarter of fiscal 2008. The majority of these decreases are related to fewer miles by our independent contractor fleet which reduced from 370 at December 31, 2007 to 206 at December 31, 2008. The decreases also related to the reduction of the fuel surcharge component of their payments by $0.16 per mile. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile.

General and other operating expense decreased to $2.1 million or 2.1% of freight revenue, for the six months ended December 31, 2008, from $2.7 million or 2.4% of freight revenue, for the six months ended December 31, 2007. These decreases are primarily attributable to our recording approximately $400,000 in bad debt expense in the December 2007 quarter in response to a major write-off of one uncollectible account.

All of our other operating expenses are relatively minor in amount, and there were no significant changes in such 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, increased 30 basis points to 3.4% of freight revenue for the second quarter of fiscal 2009, from 3.1% of freight revenue for the second quarter of fiscal 2008.

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 decreased to $1.7 million, with an effective tax rate of 49.3%, for the second quarter of fiscal 2009, from $1.9 million, with an effective tax rate of 52.1%, for the second quarter of fiscal 2008. The effective tax rate decreased as a result of the decrease in non-deductible expenses related to our per diem pay structure. As per diem is a partially non-deductible expense, our effective tax rate will fluctuate as net income and per diem fluctuates in the future.

As a result of the factors described above, net income remained steady at $1.7 million for the second quarter of fiscal 2009 and 2008, respectively.

Comparison of Six Months Ended December 31, 2008 to Six Months Ended December 31, 2007

Operating revenue decreased by $5.9 million, or 2.2%, to $266.5 million for the six months ended December 31, 2008, from $272.4 million for the six months ended December 31, 2007. Going forward, we expect the addition of the Continental assets and intermodal operations to have some affect on our operating revenue. However, for the foreseeable future we don't expect incremental growth in our fleet size following the Continental acquisition.

Freight revenue decreased by $20.6 million, or 9.0%, to $207.8 million for the six months ended December 31, 2008, from $228.4 million for the six months ended December 31, 2007. This decrease was primarily attributable to a decrease in freight demand. Accordingly, billed miles decreased by 9.8 million, from 126.0 million for the six months ended December 31, 2007, to 116.2 million for the six months ended December 31, 2008, average miles per tractor per week decreased from 2,007 miles to 1,862 miles, and non-revenue miles increased from 10.4% to 10.8% of total miles. As the freight market weakened, we took on additional freight, at lower rates, to fill the resulting void. In turn, non-revenue miles increased as we repositioned tractors for the next load. Average revenue per tractor per week, net of fuel surcharge, which is our primary measure of asset productivity, decreased 8.2% to $2,478 in the six months ended December 31, 2008, from $2,700 for the six months ended December 31, 2007.

Revenue for TruckersB2B was $4.5 million for the six months ended December 31, 2008, compared to $4.9 million for the six months ended December 31, 2007. The decrease was related to decreases in fuel and tire rebate revenue due to small and mid size carriers being adversely affected by the lagging freight demand. To the extent small and mid size carriers continue to be affected adversely by lagging freight demand, limited financing availability, and licensing, insurance, and other costs, we anticipate the revenue for TruckersB2B to be negatively impacted as well.

Salaries, wages, and benefits were $79.2 million, or 38.1% of freight revenue, for the six months ended December 31, 2008, compared to $77.2 million, or 33.8% of freight revenue, for the six months ended December 31, 2007. These increases in salaries, wages, and employee benefits are primarily due to increased driver payroll, related to an increase in company driver miles, in correlation with a corresponding decrease in independent contractor miles, and increased expenses related to equity and bonus compensation.

Fuel expenses, net of fuel surcharge revenue of $58.7 million and $44.0 million for the six months ended December 31, 2008 and 2007 respectively, decreased to $19.3 million, or 9.3% of freight revenue, for the six months ended December 31, 2008, compared to $27.0 million, or 11.8% of freight revenue, for the six months ended December 31, 2007. These decreases were primarily attributable to a new company wide fuel use reduction plan. This plan involves purchasing new, more fuel efficient equipment, adjusting the specifications to . . .