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 $490.3 million in operating revenue during our fiscal year ended June 30, 2009. 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 2009 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 partially 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 485,000 tractors. TruckersB2B is included in our e-commerce unit, which is a separate operating segment under generally accepted accounting principles.

Recent Results and Financial Condition

For the first quarter of fiscal 2010, total revenue decreased 13.0% to $127.8 million, compared with $146.9 million for the first quarter of fiscal 2009. Freight revenue, which excludes revenue from fuel surcharges, increased 1.3% to $110.7 million for the first quarter of fiscal 2010, compared with $109.3 million for the first quarter of fiscal 2009. Net income decreased 78.6% to $0.6 million from $2.8 million, and diluted earnings per share decreased to $0.03 from $0.13.

At September 30, 2009, our total balance sheet debt (including capital lease obligations less cash) was $46.5 million, and our total stockholders' equity was $145.6 million, for a total debt to capitalization ratio of 24.2%. At September 30, 2009, we had $28.9 million of available borrowing capacity under our revolving credit facility and $1.9 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, brokerage, intermodal, less-than-truckload, 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, 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 variability in fuel prices. 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 2010, we expect to obtain tractors primarily for
replacement. At September 30, 2009 the average age of our tractor fleet was
approximately 1.5 years and the average age of our trailer fleet was
approximately 5.0 years. At September 30, 2009, we had future operating lease
obligations totaling $188.7 million, including residual value guarantees of
approximately $78.6 million.

                                September 30, 2009           September 30, 2008
                              Tractors      Trailers       Tractors      Trailers

Owned equipment                  1,080         2,933          1,635         2,179
Capital leased equipment           ---         3,717            ---         3,726
Operating leased equipment       1,824         3,333          1,121         2,989
Independent contractors            317            ---           191            ---
Total                            3,221         9,983          2,947         8,894

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 September 30, 2009, there were 317 independent contractors providing a combined 9.8% 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, to overcome expected additional cost increases. Because a large percentage of our costs are variable, changes in revenue per mile affect our profitability to a greater extent than changes in miles per tractor. For the remainder of fiscal 2010, 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 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 and the difficult economy, we believe achieving our near term profitability goal will be difficult.

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 September 30,
                                                                  2009             2008

Freight revenue(1)                                                   100.0 %         100.0 %

Operating expenses:
Salaries, wages, and employee benefits                                36.1 %          37.8 %
Fuel(1)                                                               11.4 %           9.6 %
Operations and maintenance                                             7.8 %           8.6 %
Insurance and claims                                                   3.6 %           3.3 %
Depreciation and amortization                                          7.2 %           7.3 %
Revenue equipment rentals                                              8.5 %           5.5 %
Purchased transportation                                              16.4 %          14.4 %
Costs of products and services sold                                    1.5 %           1.4 %
Communications and utilities                                           1.1 %           1.1 %
Operating taxes and licenses                                           2.1 %           2.2 %
General and other operating                                            1.8 %           2.4 %

Total operating expenses                                              97.5 %          93.6 %

Operating income                                                       2.5 %           6.4 %

Other expense:
Interest expense                                                       0.7 %           1.0 %

Income before income taxes                                             1.8 %           5.4 %
Provision for income taxes                                             1.3 %           2.9 %

Net income                                                             0.5 %           2.5 %

(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 $17.1 million and $37.6 million for the first quarter of fiscal 2010 and 2009, respectively.

Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008

Total revenue decreased by $19.1 million, or 13.0%, to $127.8 million for the first quarter of fiscal 2010, from $146.9 million for the first quarter of fiscal 2009. Freight revenue excludes $17.1 million and $37.6 million of fuel surcharge revenue for the first quarter of fiscal 2010 and 2009, respectively.

Freight revenue increased by $1.4 million, or 1.3%, to $110.7 million for the first quarter of fiscal 2010, from $109.3 million for the first quarter of fiscal 2009. This marginal increase was attributable to an increase in loaded miles to 66.1 million for the first quarter of fiscal 2010, from 60.5 million for the first quarter of fiscal 2009, offset by average freight revenue per loaded mile decreasing to $1.407 for the first quarter of fiscal 2010, from $1.511 for the first quarter of fiscal 2009. This decrease in revenue per loaded mile was the result of a difficult freight market and aggressive rate environment confronting our industry and a weakened economy. This combination of factors resulted in a decrease in average revenue per tractor per week, which is our primary measure of asset productivity, to $2,495 in the first quarter of fiscal 2010, from $2,680 for the first quarter of fiscal 2009.

Revenue for TruckersB2B was flat at $2.3 million in the first quarter of fiscal 2010, compared to the first quarter of fiscal 2009.

Salaries, wages, and employee benefits were $40.0 million, or 36.1% of freight revenue, for the first quarter of fiscal 2010, compared to $41.3 million, or 37.8% of freight revenue, for the first quarter of fiscal 2009. These decreases were the result of a decrease in administrative payroll due to efforts to consolidate and/or eliminate several functions into Indianapolis from various terminals during fiscal 2009, as well as a decrease in management discretionary bonuses paid in the quarter. Also, as part of the Company's efforts to decrease costs, we had a reduction in driver pay per mile, which was offset by increased company dispatch miles, and we reduced our recruiting costs in advertising and travel in the fiscal 2010 quarter as compared to the fiscal 2009 quarter.

Fuel expenses, net of fuel surcharge revenue of $17.1 million and $37.6 million for the first quarter of fiscal 2010 and 2009, respectively, increased to $12.6 million, or 11.4% of freight revenue, for the first quarter of fiscal 2010, compared to $10.5 million, or 9.6% of freight revenue, for the first quarter of fiscal 2009. These increases were primarily attributable to an increase in total miles and an increase in non-revenue miles, for which we do not receive fuel surcharges, offset by the company-wide fuel use reduction plan. Also the average fuel price was $2.32 per gallon in the first quarter of fiscal 2010, compared to $4.01 per gallon in the first quarter of fiscal 2009. We expect that our continued efforts to reduce idling and operate more fuel efficient tractors will continue to have a positive impact on our miles per gallon; however, we expect this positive impact to be partially offset by lower fuel economy on EPA-mandated new engines and use of ultra-low sulfur diesel fuel.

Operations and maintenance decreased to $8.7 million, or 7.8% of freight revenue, for the first quarter of fiscal 2010, from $9.4 million, or 8.6% of freight revenue, for the first quarter of fiscal 2009. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. These decreases in the first quarter of fiscal 2010 are primarily related to decreases in costs associated with tractor maintenance, increased warranty recovery, various direct costs such as driver layover, local spotting services and security, and physical damage expenses compared to the first quarter of fiscal 2009.

Insurance and claims expense increased to $3.9 million, or 3.6% of freight revenue, for the first quarter of fiscal 2010, from $3.6 million, or 3.3% of freight revenue, for the first quarter of fiscal 2009. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance, in addition to claims expense. These increases resulted primarily from increases in cargo and workers' compensation claims 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, remained relatively unchanged at $8.0 million, or 7.2% of freight revenue, for the first quarter of fiscal 2010, compared to $8.0 million, or 7.3% of freight revenue, for the first quarter of fiscal 2009. Tractor depreciation decreased by $1.6 million, related to a net decrease of approximately 600 tractors out of our owned fleet as compared to the first quarter of fiscal 2009. This decrease was offset by losses on sale of equipment, which include expenses to prepare the equipment for sale, of $0.4 million during the first quarter of 2010 as compared to gains of $1.0 million in the first quarter of fiscal 2009. 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 $9.4 million or 8.5% of freight revenue, for the first quarter of fiscal 2010, compared to $6.1 million, or 5.5% of freight revenue, for the first quarter of fiscal 2009. These increases were attributable to an increase in the number of tractors and trailers financed under operating leases. At September 30, 2009, 1,824 tractors, or 62.8% of our company tractors, were held under operating leases, compared to 1,121 tractors, or 40.7% of our company tractors, at September 30, 2008. At September 30, 2009, 3,333 trailers, or 33.4%, of our trailer fleet were held under operating leases, compared to 2,989, or 33.6% of our trailer fleet, at September 30, 2008. Given that we expect to use operating leases for the acquisition of certain tractors in fiscal 2010, we expect our revenue equipment rental to increase as a percentage of freight revenue going forward.

Purchased transportation increased to $18.1 million, or 16.4% of freight revenue, for the first quarter of fiscal 2010, from $15.8 million or 14.4% of freight revenue, for the first quarter of fiscal 2009. These increases are primarily related to an increase in independent contractor miles to 8.3 million in the first quarter of fiscal 2010 compared to 4.9 million miles in the first quarter of 2009. These increases were partially offset by a decrease in rate per mile, due to a decrease in fuel surcharges. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We expect purchase transportation to increase as we increase the number of independent contractors in our fleet and continue to increase our purchase transportation for brokerage and intermodal transportation.

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, decreased 360 basis points to 1.8% of freight revenue for the first quarter of fiscal 2010, from 5.4% of freight revenue for the first quarter of fiscal 2009.

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

Income taxes decreased to $1.4 million, with an effective tax rate of 71.5%, for the first quarter of fiscal 2010, from $3.1 million, with an effective tax rate of 52.7%, for the first quarter of fiscal 2009. As pre-tax net income decreases, our non-deductible expenses, such as per diem expense, will have a greater impact on our effective rate.

As a result of the factors described above, a net income of $0.6 million was recorded for the first quarter of fiscal 2010, compared to a net income of $2.8 million for the first quarter of fiscal 2009.

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 in the future. 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 September 30, 2009, we had on order 460 tractors for delivery through fiscal 2010. These revenue equipment orders represent a capital commitment of approximately $43.4 million, before considering the proceeds of equipment dispositions. We are using a mixture of cash and off balance sheet debt to purchase our new tractors and are using off balance sheet debt to acquire most of the new trailers. At September 30, 2009, our total balance sheet debt, including capital lease obligations and current maturities less cash, was $46.5 million, compared to $81.0 million at September 30, 2008. Our debt-to-capitalization ratio (total balance sheet debt as a percentage of total balance sheet debt plus total stockholders' equity) was 24.2% at September 30, 2009, and 35.7% at September 30, 2008.

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 our primary credit facility, and lease financing arrangements. We will continue to have significant capital requirements over the long term, and the availability of the needed capital will depend upon our financial condition and operating results and numerous other factors over which we have limited or no control, including prevailing market conditions and the market price of our common stock. However, based on our operating results, anticipated future cash flows, current availability under our credit facility, and sources of equipment lease financing that we expect will be available to us, we do not expect to experience significant liquidity constraints in the foreseeable future.

Cash Flows

For the three months ended September 30, 2009, net cash provided by operations was $9.0 million, compared to cash provided by operations of $19.3 million for the three months ended September 30, 2008. Cash provided by operations decreased due to an increase in trade receivables and prepaid exenses.

Net cash used in investing activities was $7.5 million for the three months ended September 30, 2009, compared to net cash used in investing activities of $0.2 million for the three months ended September 30, 2008. Cash used in investing activities includes the net cash effect of acquisitions and dispositions of revenue equipment during each period. Capital expenditures for equipment totaled $11.7 million for the three months ended September 30, 2009, and $10.6 million for the three months ended September 30, 2008. We generated proceeds from the sale of property and equipment of $4.3 million and $10.4 million for the three months ended September 30, 2009, and September 30, 2008, respectively.

Net cash used in financing activities was $0.6 million for the three months ended September 30, 2009, compared to $21.3 million for the three months ended September 30, 2008. The decrease in cash used for financing activities was primarily due to a decrease in payments of long-term debt. Financing activity represents borrowings (new borrowings, net of repayment) and payments 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 . . .