Part I. Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at September 30, 2005 (Unaudited) and June 30, 2005	3

		Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2005 and 2004 (Unaudited)	5

		Notes to Condensed Consolidated Financial Statements (Unaudited)	6

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18

	Item 4.	Controls and Procedures	19

Part II. Other Information

	Item 1.	Legal Proceedings	20

	Items 2, 3, 4, and 5 Not Applicable

	Item 6.	Exhibits	20

	September 30,			June 30,
	2005			2005
A S S E T S	(unaudited)

Current assets:
Cash and cash equivalents	$	6,322		$	11,115
Trade receivables, net of allowance for doubtful accounts of $1,426 and $1,496 at September 30, 2005 and June 30, 2005		57,987			55,760
Accounts receivable - other		2,260			2,727
Prepaid expenses and other current assets		9,329			3,599
Tires in service		3,214			3,308
Deferred income taxes		2,424			2,424
Total current assets		81,536			78,933
Property and equipment		88,703			88,230
Less accumulated depreciation and amortization		30,486			30,685
Net property and equipment		58,217			57,545
Tires in service		1,763			1,739
Goodwill		19,137			19,137
Other assets		4,131			2,089
Total assets	$	164,784		$	159,443

L I A B I L I T I E S A N D S T O C K H O L D E R S’ E Q U I T Y

Current liabilities:
Accounts payable	$	3,526		$	4,465
Accrued salaries and benefits		10,005			11,141
Accrued insurance and claims		10,720			10,021
Accrued independent contractor expense		1,194			1,265
Accrued fuel expense		5,775			6,104
Other accrued expenses		11,490			10,222
Current maturities of long-term debt		1,065			1,057
Current maturities of capital lease obligations		255			788
Income tax payable		1,360			265
Total current liabilities		45,390			45,328
Long-term debt, net of current maturities		4,885			4,239
Capital lease obligations, net of current maturities		1,175			1,260
Deferred income taxes		9,594			10,100
Minority interest		25			25
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 179,985 shares; no shares issued and outstanding		—			—
Common stock, $0.033 par value, authorized 12,000,000 shares issued 10,080,449 and 9,778,550 shares in fiscal 2006 and 2005 respectively		333			332
Additional paid-in capital		89,140			89,359
Retained earnings		16,228			11,544
Unearned compensation of restricted stock		—			(711	)
Accumulated other comprehensive loss		(1,986	)		(2,033	)
Total stockholders’ equity		103,715			98,491
Total liabilities and stockholders’ equity	$	164,784		$	159,443

See accompanying notes to the condensed consolidated financial statements.

	2005			2004

Revenue:
Freight revenue	$	103,340		$	98,113
Fuel surcharges		14,595			6,280
		117,935			104,393

Operating expenses:
Salaries, wages and employee benefits		34,863			33,174
Fuel		26,220			17,860
Operations and maintenance		7,282			8,908
Insurance and claims		3,386			3,004
Depreciation and amortization		3,163			3,368
Revenue equipment rentals		10,372			7,878
Purchased transportation		17,823			18,540
Cost of products and services sold		1,294			1,203
Professional and consulting fees		852			501
Communications and utilities		1,019			1,032
Operating taxes and licenses		2,061			2,085
General and other operating		1,504			1,521
Total operating expenses		109,839			99,074

Operating income		8,096			5,319

Other (income) expense:
Interest income		(1	)		(18	)
Interest expense		302			350
Other (income) expense, net		25			(9	)
Income before income taxes		7,770			4,996
Provision for income taxes		3,086			2,245
Net income	$	4,684		$	2,751

Earnings per common share:
Diluted earnings per share	$	0.45		$	0.27
Basic earnings per share	$	0.47		$	0.28
Average shares outstanding:
Diluted		10,314			10,253
Basic		10,058			9,761

	2005			2004

Cash flows from operating activities:
Net income	$	4,684		$	2,751
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,163			3,368
Stock based compensation		873			266
Provision (benefit) for deferred income taxes		(506	)		5
Provision for doubtful accounts		138			372
Changes in assets and liabilities:
Trade receivables		(2,365	)		1,514
Accounts receivable - other		467			(1,076	)
Tires in service		70			(719	)
Prepaid expenses and other current assets		(5,731	)		(1,096	)
Other assets		(2,091	)		58
Accounts payable and accrued expenses		(1,092	)		2,479
Income tax payable		1,096			(933	)
Net cash (used in) provided by operating activities		(1,294	)		6,989

Cash flows from investing activities:
Purchase of property and equipment		(10,788	)		(9,080	)
Proceeds on sale of property and equipment		8,073			5,691
Purchase of minority shares of subsidiary		—			(390	)
Net cash used in investing activities		(2,715	)		(3,779	)
Cash flows from financing activities:
Proceeds from issuances of common stock		205			180
Payments on long-term debt		(371	)		(1,038	)
Principal payments on capital lease obligations		(618	)		(832	)
Net cash used in financing activities		(784	)		(1,690	)

Increase (decrease) in cash and cash equivalents		(4,793	)		1,520
Cash and cash equivalents at beginning of period		11,115			356
Cash and cash equivalents at end of period	$	6,322		$	1,876
Supplemental disclosure of cash flow information:
Interest paid	$	281		$	346
Income taxes paid	$	2,359		$	3,168
Supplemental disclosure of non-cash flow investing activities:
Lease obligation/debt incurred in the purchase of equipment	$	1,025			—
Note payable obligation incurred in purchase of minority shares		—		$	910

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (all of a normal recurring nature), which are necessary for a fair presentation of the financial condition and results of operations for these periods. The results of operations for the interim period are not necessarily indicative of the results for a full year. These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

In December 2004, the FASB issued SFAS No. 123-R, Share-Based Payments, an Amendment of SFAS 123 on Accounting for Stock Based Compensation. SFAS 123-R requires companies to recognize in the income statement the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123-R is effective for most public companies with interim or annual periods beginning after June 15, 2005. 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. The amount of the impact was immaterial to the Company for the three months ended September 30, 2005.

On September 26, 2005, Celadon Group, Inc., a Delaware corporation (the “Company”), Celadon Trucking Services, Inc., a New Jersey corporation and wholly-owned subsidiary of the Company, and TruckersB2B, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, entered into an unsecured Credit Agreement with LaSalle Bank National Association, as administrative agent, and LaSalle Bank National Association, Fifth Third Bank (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures on September 24, 2010 (the “Credit Agreement”). The Credit Agreement will be used to refinance the Company’s existing credit facility and 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 Servicios de Transportacion Jaguar, S.A. de C.V., each of which is a subsidiary of the Company.

The Credit Agreement has a maximum revolving borrowing limit of $50.0 million, and the Company may increase the revolving borrowing limit by an additional $20.0 million, to a total of $70.0 million. Letters of credit are limited to an aggregate commitment of $15.0 million and a swing line facility has a limit of $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and 0.225% per annum based on cash flow coverage is due on the daily unused portion of the Credit Agreement. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, mergers, consolidations, acquisitions and dispositions, and total indebtedness. The Credit Agreement includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Agreement may be accelerated and the Lenders’ commitments may be terminated.

The Company’s largest customer is DaimlerChrysler, which accounted for approximately 3% and 6% of the Company’s total revenue for the three months ended September 30, 2005 and 2004, respectively. The Company transports DaimlerChrysler original equipment automotive parts primarily between the United States and Mexico and DaimlerChrysler after-market replacement parts and accessories within the United States. The Company’s agreement with DaimlerChrysler is an agreement for international freight with the Chrysler division, which expires in October 2006. No other customer accounted for more than 5% of the Company’s total revenue during any of its three most recent fiscal years.

There are various claims, lawsuits, and pending actions against the Company and its subsidiaries in the normal course of the operations of its businesses with respect to cargo, auto liability, or income taxes. The Company believes many of these proceedings are covered in whole or in part by insurance and that none of these matters will have a material adverse effect on its consolidated financial position or results of operations in any given period.

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, performance, and results of operations include the factors listed on Exhibit 99.1 to this report.

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.

We are one of North America’s fifteen largest truckload carriers as measured by revenue. We generated $436.8 million in operating revenue during our fiscal year ended June 30, 2005. 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 its two largest trading partners, Mexico and Canada. We generated approximately one-half of our revenue in fiscal 2005 from international movements, and we believe our annual border crossings make us the largest provider of international truckload movements in North America. We believe that our strategically located terminals and experience with the language, culture, and border crossing requirements of each North American country provide a competitive advantage in the international trucking marketplace.

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

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

For the first quarter of fiscal 2006, operating revenue increased 12.9% to $117.9 million, compared with $104.4 million for the same quarter last year. Net income increased to $4.7 million from $2.8 million, and diluted earnings per share improved to $0.45 from $0.27. We believe that a favorable relationship between freight demand and the industry-wide supply of tractor and trailer capacity, as well as our dedication to pricing discipline, yield management, and customer service, contributed to our increase in earnings for the first fiscal quarter versus the prior year.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At September 30, 2005, we had approximately $7.4 million of long-term debt and capital lease obligations, including current maturities, and $103.7 million in stockholders' equity. The average age of our tractor fleet was constant at 2.1 years as of September 30, 2005 and 2004, and we lowered the average age of our trailer fleet to 3.7 years from 4.5 years as of September 30, 2004. We anticipate that the size of our tractor fleet will remain relatively constant or grow modestly, excluding growth resulting from any acquisitions. We expect our tractor and trailer purchases will be primarily for replacement and will maintain the average age of our tractor fleet at approximately 2.0 years and the average age of our trailer fleet 4.0 years or less during the 2006 fiscal year. We expect that our equipment purchases will be financed using cash generated from operations or with off-balance sheet operating leases. At September 30, 2005, we had future operating lease obligations totaling $197.3 million, including residual value guarantees of approximately $70.5 million, which we believe will be largely covered by manufacturer commitments. Of our tractors, approximately 367 were owned, 1,868 were financed under operating leases, and 346 were provided by independent contractors, who own (or lease) and drive their own tractors, at September 30, 2005. Of our trailers, approximately 1,500 were owned and the remaining were financed under capital and operating leases at September 30, 2005.

	For the three months ended September 30,
	2005	2004
Operating Revenues	100%	100%
Operating expenses:
Salaries, wages and employee benefits	29.6%	31.8%
Fuel	22.2%	17.1%
Operations and maintenance	6.2%	8.5%
Insurance and claims	2.9%	2.9%
Depreciation and amortization	2.7%	3.2%
Revenue equipment rentals	8.8%	7.5%
Purchased transportation	15.1%	17.8%
Costs of products and services sold	1.1%	1.2%
Professional and consulting fees	0.7%	0.5%
Communications and utilities	0.9%	1.0%
Operating taxes and licenses	1.7%	2.0%
General and other operating	1.2%	1.4%
Total operating expenses	93.1%	94.9%
Operating income	6.9%	5.1%
Other (income) expense:
Interest expense	0.3%	0.3%
Income before income taxes	6.6%	4.8%
Provision for income taxes	2.6%	2.2%

Net income	4.0%	2.6%

Freight Revenue⁽¹⁾	100%	100%
Operating expenses:
Salaries, wages and employee benefits	33.7%	33.8%
Fuel⁽¹⁾	11.2%	11.8%
Operations and maintenance	7.0%	9.1%
Insurance and claims	3.3%	3.1%
Depreciation and amortization	3.1%	3.4%
Revenue equipment rentals	10.0%	8.0%
Purchased transportation	17.2%	18.9%
Costs of products and services sold	1.3%	1.2%
Professional and consulting fees	0.8%	0.5%
Communications and utilities	1.0%	1.1%
Operating taxes and licenses	2.0%	2.1%
General and other operating	1.6%	1.6%
Total operating expenses	92.2%	94.6%
Operating income	7.8%	5.4%
Other (income) expense:
Interest expense	0.3%	0.3%
Income before income taxes	7.5%	5.1%
Provision for income taxes	3.0%	2.3%

Net income	4.5%	2.8%

(1)	Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. The amounts were $14.6 million and $6.3 million for the first fiscal quarter of 2006 and 2005, respectively.

Freight revenue increased by $5.2 million, or 5.3% to $103.3 million for the first fiscal quarter of 2006 from $98.1 million for the first fiscal quarter of 2005. This increase was primarily attributable to a 6.6% improvement in average revenue per total mile, excluding fuel surcharge, to $1.364 from $1.280. The improvement in average revenue per total mile resulted primarily from better overall freight rates at the end of fiscal 2005 and the first fiscal quarter of fiscal 2006, 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. For the quarter, capacity in the industry was tight relative to demand. Revenue per tractor per week, excluding fuel surcharge, which is our primary measure of asset productivity, increased 3.9% to $2,976 for the first fiscal quarter of 2006, from $2,864 for the first fiscal quarter of 2005, as a result of an increase in revenue per mile. Revenue for TruckersB2B was constant at $2.0 million for the first fiscal quarter of 2006 and the first fiscal quarter of 2005. The TruckersB2B revenue is generated from member usage of various programs, the largest being the fuel and tire discount programs.

Salaries, wages, and employee benefits were $34.9 million, or 33.7% of freight revenue, for fiscal 2006, compared to $33.2 million, or 33.8% of freight revenue, for the first fiscal quarter of 2005. The increase in the overall dollar amount primarily was related to a 4.8% increase in company miles, which in turn increased driver wages. The remaining increase in this expense category was due to an increase in administrative payroll related expenses.

Fuel expenses, net of fuel surcharge revenue of $14.6 million and $6.3 million for the first fiscal quarters of 2006 and 2005, respectively, remained constant at $11.6 million, or 11.2% of freight revenue, for the first fiscal quarter of 2006, compared to $11.6 million, or 11.8% of freight revenue, for the same period in fiscal 2005. Despite an increase in the Department of Energy fuel cost index of about $0.75 per gallon, we were able to keep our fuel cost down through our fuel surcharge program. We expect fuel prices may remain at relatively high levels due to low inventory. If this occurs, higher fuel prices will increase our operating expenses to the extent we cannot offset them with surcharges.

Operations and maintenance consist of direct operating expense, maintenance, and tire expense. This category decreased to $7.3 million for the first fiscal quarter of 2006, from $8.9 million for the first fiscal quarter of 2005. As a percentage of freight revenue, operations and maintenance decreased to 7.0% of freight revenue for the first fiscal quarter of 2006, compared to 9.1% for the first fiscal quarter of 2005. The decrease in maintenance expense as a percentage of freight revenue for the first fiscal quarter of 2006 was primarily the result of our fleet upgrade initiative, implementing a tractor trade cycle change from 4 years to 3 years as well as reduced expenses to repair tractors for trade-in. We expect our maintenance expense will continue to decrease as a percentage of revenue due to these initiatives.

Insurance and claims expense was $3.4 million, or 3.3% of freight revenue, for the first fiscal quarter of 2006, compared to $3.0 million, or 3.1% of freight revenue, for the first fiscal quarter of 2005. The primary reason for the increase in insurance and claims expense relates to increased legal expense incurred in defense and settlement of various cases. Our insurance expense consists of premiums and deductible amounts for liability, physical damage, and cargo damage insurance. Our insurance program involves self-insurance at various risk retention levels. Claims in excess of these risk levels are covered by insurance in amounts we consider to be adequate. We accrue for the uninsured portion of claims based on known claims and historical experience. Insurance and claims expense will vary based primarily on the frequency and severity of claims, the level of self-retention and the premium expense.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $3.2 million, or 3.1% of freight revenue, for the first fiscal quarter of 2006 from $3.4 million, or 3.4% of freight revenue, for the first fiscal quarter of 2005. 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 owned or financed with capital leases. We expect to use available cash generated from operations to purchase new tractors and trailers, which will increase depreciation during fiscal 2006, with the remaining additions to be acquired under off-balance sheet operating leases.

Revenue equipment rentals were $10.4 million, or 10.0% of freight revenue, for the first fiscal quarter of 2006, compared to $7.9 million, or 8.0% of freight revenue, for the first fiscal quarter of 2005. As of September 30, 2005, we had financed 1,868 tractors and 5,471 trailers under operating leases as compared to 1,454 tractors and 4,656 trailers as of September 30, 2004. This increase was attributable to a higher proportion of our tractor and trailer fleet held under operating leases for the first fiscal quarter of 2006. As we expect to acquire a portion of the new tractors and trailers with operating leases, we expect revenue equipment rentals will increase. However, the rate of increase may slow as we generate cash from operations to purchase new tractors and trailers.

Purchased transportation decreased to $17.8 million, or 17.2% of freight revenue, for the first fiscal quarter of 2006, from $18.5 million, or 18.9% of freight revenue, for the first fiscal quarter of 2005. This decrease was primarily related to reduced independent contractor expense, as the percentage of our fleet comprised of independent contractors decreased to 346 independent contractors at September 30, 2005 from 459 at September 30, 2004. This decrease was partially offset due to increased payments to independent contractors resulting from fuel surcharges collected due to rising fuel costs, which are passed through to our independent contractors on a per mile basis. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We expect the majority of our equipment additions to come in our company-operated fleet. As a result, the percentage of our fleet comprised of independent contractors may continue to decline, with a corresponding decrease in this expense category. It has become difficult to recruit and retain independent contractors.

Income taxes increased to $3.1 million for the first fiscal quarter of 2006, from $2.2 million for the first fiscal quarter of 2005. The effective tax rate decreased to 39.7% for the first fiscal quarter of 2006 from 44.9% for the first fiscal quarter of 2005 as a result of the increased earnings causing less impact on non-deductible expenses. Due to the non-deductible effects of our driver per diem pay structure, our tax rate will fluctuate in future periods as income fluctuates.

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. Our principal sources of liquidity are cash generated from operations, bank borrowings, capital and operating lease financing of revenue equipment, proceeds from the sale of used revenue equipment, and, to a lesser extent, the sale of shares of our common stock.

Net cash used in investing activities was $2.7 million for the first fiscal quarter of 2006, compared to $3.8 million for the same period in fiscal 2005. Cash used in investing activities includes the net cash effect of acquisitions and dispositions of revenue equipment during each period. Capital expenditures totaled $10.8 million for the first fiscal quarter of 2006 and $9.1 million for the first fiscal quarter of 2005. We generated proceeds from the sale of property and equipment of $8.1 million during the first three months of fiscal 2006, compared to $5.7 million in proceeds for the same period in fiscal 2005.

As of September 30, 2005, we had on order 1,064 tractors for delivery through fiscal 2008. These revenue equipment orders represent a capital commitment of approximately $88.6 million, before considering the proceeds of equipment dispositions. We have purchased the new tractors in fiscal 2006 using cash generated from operations. A portion of the used equipment that has been or will be replaced by these new units was or is owned or held under capital leases and, therefore, carried on our balance sheet. Our debt-to-capitalization ratio (total balance sheet debt as a percentage of total balance sheet debt plus total stockholders’ equity) decreased to 6.6% at September 30, 2005, from 6.9% at September 30, 2004.

Over the past several years, we have financed most of our new tractors and trailers under operating leases, which are not reflected on our balance sheet. The use of operating leases also affects our statements of cash flows. For assets subject to these operating leases, we do not record depreciation as an increase to net cash provided by operations, nor do we record any entry with respect to investing activities or financing activities.

Our operating leases include some under which we do not guarantee the value of the asset at the end of the lease term (“walk-away leases”) and some under which we do guarantee the value of the asset at the end of the lease term. We were obligated for residual value payments related to operating leases of $70.5 million and $41.1 million at September 30, 2005 and 2004, respectively. A 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. We anticipate that our continued reliance on operating leases, rather than bank borrowings or capital leases, to finance the acquisition of revenue equipment in connection with our fleet upgrade will allow us to use our cash flows to further reduce our balance sheet debt.

The tractors on order are not protected by manufacturers’ repurchase arrangements and are not subject to “walk-away” leases under which we can return the equipment without liability regardless of its market value at the time of return. Therefore, we are subject to the risk that equipment values 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 provide to our equipment lessors.

The Credit Agreement has a maximum revolving borrowing limit of $50.0 million, and the Company may increase the revolving borrowing limit by an additional $20.0 million, to a total of $70.0 million. Letters of credit are limited to an aggregate commitment of $15.0 million and a swing line facility has a limit of $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and 0.225% per annum based on cash flow coverage is due on the daily unused portion of the Credit Agreement. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, mergers, consolidations, acquisitions and dispositions, and total indebtedness. We were in compliance with these covenants at September 30, 2005, and expect to remain in compliance for the foreseeable future. At September 30, 2005, none of our credit facility was utilized as outstanding borrowings and $6.4 million was utilized for standby letters of credit.

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

	Annual Cash Requirements as of September 30, 2005 (in thousands) Amounts Due by Period

	Total		Less than One Year		One to Three Years		Three to Five Years		Over Five Years
	Total		Less than One Year		One to Three Years		Three to Five Years		Over Five Years

Operating leases	$	126,725	$	39,974	$	49,226	$	29,507	$	8,018
Lease residual value guarantees	$	70,525	$	9,798	$	31,566	$	4,577	$	24,584
Capital leases⁽¹⁾	$	1,646	$	327	$	601	$	290	$	428
Long-term debt⁽¹⁾	$	6,938	$	1,455	$	4,100	$	1,383	$	—
Subtotal	$	205,834	$	51,554	$	85,493	$	35,757	$	33,030

Future purchase of revenue equipment	$	88,597	$	37,811	$	9,352	$	17,158	$	24,276
Employment and consulting agreements ⁽²⁾	$	1,293	$	973	$	139	$	139	$	42
Standby letters of credit	$	6,350	$	6,350	$	—	$	—	$	—

Total	$	302,074	$	96,688	$	94,984	$	53,054	$	57,348

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

Depreciation of Property and Equipment. We depreciate our property and equipment using the straight line method over the estimated useful life of the asset. We generally use estimated useful lives of 3 to 10 years for tractors and trailers, and estimated salvage values for tractors and trailers generally range from 35% to 50% of the capitalized cost. Gains and losses on the disposal of revenue equipment are included in depreciation expense in our statements of operations.

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

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

Operating leases. We have financed a majority of our revenue equipment acquisitions with operating leases, rather than with bank borrowings or capital lease arrangements. These leases generally contain residual value guarantees, which provide that the value of equipment returned to the Lessor at the end of the lease term will be no lower than a negotiated amount. To the extent that the value of the equipment is below the negotiated amount, we are liable to the Lessor for the shortage at the expiration of the lease. For approximately 39% of our tractors and 25% of our trailers under operating lease, we have residual value guarantees from the manufacturer at amounts equal to our residual obligation to the lessors. For all other equipment (or to the extent we believe any manufacturer will refuse or be unable to meet its obligation), we are required to recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor.

In accordance with Statement of Financial Accounting Standards (“SFAS”) 13, “Accounting for Leases,” property and equipment held under operating leases, and liabilities related thereto, are not reflected on our balance sheet. All expenses related to revenue equipment operating leases are reflected on our statements of operations in the line item entitled “Revenue equipment rentals.” As such, financing revenue equipment with operating leases instead of bank borrowings or capital leases effectively moves the interest component of the financing arrangement into operating expenses on our statements of operations. Consequently, we believe that pretax margin (income before income taxes as a percentage of operating revenue) may provide a more useful measure of our operating performance than operating ratio (operating expenses as a percentage of operating revenue) because it eliminates the impact of revenue equipment financing decisions.

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, frequency, and adverse development of claims incurred in a given period.

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

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

We have substantial operations in the Midwestern and Eastern United States 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.

Many of our operating expenses, including fuel costs, revenue equipment, and driver compensation 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. The effects of inflation on revenue were not material in the past three years. We have limited the effects of inflation through increases in freight rates and fuel surcharges.

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 that in the first quarter ended September 30, 2005 (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 $230,000.

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 that in the first quarter ended September 30, 2005 (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 $2,000.

In response to increases in Canadian dollar exchange rates, we have from time-to-time entered into derivative financial instruments to reduce our exposure to currency fluctuations. In June 1998, the FASB issued SFAS 133, “Accounting for Derivative Instruments and Certain Hedging Activities.” In June 2000, the FASB issued SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133.” SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. Derivatives that are not hedges must be adjusted to fair value through earnings. As of September 30, 2005, we had no currency exposure hedged.

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, market, and climatic factors that are outside of our control. Historically, we have sought to recover a portion of short-term increases in fuel prices from customers through the collection of fuel surcharges. However, fuel surcharges do not always fully offset increases in fuel prices. In addition, from time-to-time we may enter into derivative financial instruments to reduce our exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust any such derivative instruments to fair value through earnings on a monthly basis. As of September 30, 2005, we had no fuel derivatives in place.

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company has carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "Commission"). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosures.

The Company has confidence in its disclosure controls and procedures. Nevertheless, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

	3.1	Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
	3.2	Certificate of Amendment of Certificate of Incorporation dated February 2, 1995 decreasing aggregate number of authorized shares to 12,179,985. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1995, filed with the SEC on December 1, 1995.)
	3.3	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.)
	3.4	By-laws. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
	10.20	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.)
	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.*
	99.1	Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements.*

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Celadon Group, Inc.

(Registrant)

/s/ Stephen Russell

Stephen Russell

Chairman of the Board and

Chief Executive Officer

/s/ Paul A. Will

Paul A. Will

Chief Financial Officer, Treasurer and

Assistant Secretary

Date: November 2, 2005

DELAWARE	13-3361050
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)

9503 East 33^rd Street	46235
Indianapolis, IN	(Zip Code)
(Address of principal executive offices)

	For the three months ended September 30, 2004
Net income	$2,751
Stock-based compensation expense (net of tax)	96
Pro-forma net income	$2,655

Income per share:
Diluted earnings per share
As reported	$0.27
Pro-forma	$0.26
Basic Earnings per share:
As reported	$0.28
Pro-forma	$0.27

	Transportation		E-commerce		Consolidated
Three months ended September 30, 2005
Operating revenue	$	115,960	$	1,975	$	117,935
Operating income		7,741		355		8,096

Three months ended September 30, 2004
Operating revenue	$	102,386	$	2,007	$	104,393
Operating income		4,899		420		5,319

	United States		Canada		Mexico		Consolidated
Three months ended September 30, 2005
Operating revenue	$	96,638	$	14,755	$	6,542	$	117,935

Three months ended September 30, 2004
Operating revenue	$	84,858	$	14,321	$	5,214	$	104,393

	For the three months ended
	September 30,
	2005		2004

Net income	$	4,684	$	2,751

Denominator
Weighted average number of common shares outstanding		10,058		9,761
Equivalent shares issuable upon exercise of stock options		256		492

Diluted shares		10,314		10,253

Earnings per share
Basic	$	0.47	$	0.28
Diluted	$	0.45	$	0.27

	Three months ended September 30,
	2005		2004

Net income	$	4,684	$	2,751

Foreign currency translation adjustments		47		116

Total comprehensive income	$	4,731	$	2,867

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings