Form 10-Q (Celadon Group, Inc.)

Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at March 31, 2006 (Unaudited) and June 30, 2005	3

		Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2006 and 2005 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2006 and 2005 (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	19

	Item 4.	Controls and Procedures	19

Part II.	Other Information

	Item 1.	Legal Proceedings.	21

	Items 2. and 3.		Not Applicable

	Items 4.	Submission of Matters to a Vote of Security Holders	21

	Item 5.		Not Applicable

	Item 6.	Exhibits	21

	March 31, 2006			June 30, 2005
	(unaudited)
A S S E T S

Current assets:
Cash and cash equivalents	$	15,324		$	11,115
Trade receivables, net of allowance for doubtful accounts of $1,395 and $1,496 at March 31, 2006 and June 30, 2005		52,584			55,760
Accounts receivable - other		1,414			2,727
Prepaid expenses and other current assets		8,059			3,599
Tires in service		2,800			3,308
Income tax receivable		905			---
Deferred income taxes		2,424			2,424
Total current assets		83,510			78,933
Property and equipment		95,362			88,230
Less accumulated depreciation and amortization		30,430			30,685
Net property and equipment		64,932			57,545
Tires in service		1,483			1,739
Goodwill		19,137			19,137
Other assets		2,201			2,089
Total assets	$	171,263		$	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	$	3,962		$	4,465
Accrued salaries and benefits		12,644			11,523
Accrued insurance and claims		7,805			10,021
Accrued fuel expense		5,230			6,104
Other accrued expenses		11,932			11,105
Current maturities of long-term debt		864			1,057
Current maturities of capital lease obligations		306			788
Income tax payable		---			265
Total current liabilities		42,743			45,328
Long-term debt, net of current maturities		4,972			4,239
Capital lease obligations, net of current maturities		1,210			1,260
Deferred income taxes		8,418			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 40,000,000 shares; issued 15,280,010 and 10,050,449 shares at March 31, 2006 and June 30, 2005		504			332
Additional paid-in capital		89,911			89,359
Retained earnings		25,704			11,544
Unearned compensation of restricted stock		---			(711	)
Accumulated other comprehensive loss		(2,224	)		(2,033	)
Total stockholders’ equity		113,895			98,491
Total liabilities and stockholders’ equity	$	171,263		$	159,443

	For the three months ended March 31,						For the nine months ended March 31,
	2006			2005			2006			2005
Revenue:
Freight revenue	$	100,844		$	99,202		$	307,072		$	294,681
Fuel surcharges		14,469			9,331			46,450			25,116
		115,313			108,533			353,522			319,797

Operating expenses:
Salaries, wages, and employee benefits		35,697			33,015			106,028			98,587
Fuel		25,289			21,093			79,436			57,843
Operations and maintenance		7,087			8,279			21,811			26,086
Insurance and claims		3,620			3,597			10,967			9,927
Depreciation and amortization		3,199			3,939			9,283			10,941
Revenue equipment rentals		9,718			9,041			30,344			25,553
Purchased transportation		16,272			17,318			51,935			55,362
Costs of products and services sold		1,349			1,193			3,990			3,509
Professional and consulting fees		644			784			2,197			1,809
Communications and utilities		1,007			1,116			3,050			3,170
Operating taxes and licenses		1,891			2,210			6,104			6,390
General and other operating		1,574			1,624			4,539			4,712
Total operating expenses		107,347			103,209			329,684			303,886

Operating income		7,966			5,324			23,838			15,911

Other (income) expense:
Interest income		(41	)		(1	)		(119	)		(7	)
Interest expense		227			412			727			1,100
Other (income) expense, net		3			2			29			8
Income before income taxes		7,777			4,911			23,201			14,810
Provision for income taxes		3,100			2,169			9,041			6,544
Net income	$	4,677		$	2,742		$	14,160			8,266

Earnings per common share:
Diluted earnings per share ⁽¹⁾	$	0.30		$	0.18		$	0.91		$	0.54
Basic earnings per share ⁽¹⁾	$	0.31		$	0.18		$	0.93		$	0.56
Average shares outstanding:
Diluted ⁽¹⁾		15,664			15,475			15,556			15,316
Basic ⁽¹⁾		15,285			15,038			15,166			14,794

	2006			2005

Cash flows from operating activities:
Net income	$	14,160		$	8,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,283			10,941
Stock based compensation		2,484			607
Benefit for deferred income taxes		(1,682	)		143
Provision for doubtful accounts		556			1,025
Changes in assets and liabilities:
Trade receivables		2,620			(1,692	)
Accounts receivable - other		1,313			2,297
Income tax recoverable		(905	)		---
Tires in service		764			459
Prepaid expenses and other current assets		(4,460	)		815
Other assets		(138	)		89
Accounts payable and accrued expenses		(3,593	)		2,768
Income tax payable		(265	)		(1,511	)
Net cash provided by operating activities		20,137			24,207

Cash flows from investing activities:
Purchase of property and equipment		(47,407	)		(23,079	)
Proceeds on sale of property and equipment		32,447			21,613
Purchase of minority shares of subsidiary		---			(2,495	)
Purchase of a business, net of cash acquired		---			(22,700	)
Net cash used in investing activities		(14,960	)		(26,661	)

Cash flows from financing activities:
Proceeds from issuances of common stock		900			1,814
Proceeds from bank borrowings and debt		---			6,645
Payments on long-term debt		(1,095	)		(2,677	)
Principal payments under capital lease obligations		(773	)		(2,985	)
Net cash (used in) provided by financing activities		(968	)		2,797

Increase in cash and cash equivalents		4,209			343

Cash and cash equivalents at beginning of period		11,115			356
Cash and cash equivalents at end of period	$	15,324		$	699
Supplemental disclosure of cash flow information:
Interest paid	$	717		$	1,058
Income taxes paid	$	12,215		$	7,530
Supplemental disclosure of non-cash flow investing activities:
Lease obligation/debt incurred in the purchase of equipment	$	1,876		$	---
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.

	For three months ended March 31,				For nine months ended March 31,
	2006		2005		2006		2005

Net income	$	4,677	$	2,742	$	14,160	$	8,266

Denominator
Weighted average number of common shares outstanding		15,285		15,038		15,166		14,794
Equivalent shares issuable upon exercise of stock options		379		437		390		522

Diluted shares		15,664		15,475		15,556		15,316

Earnings per share
Basic	$	0.31	$	0.18	$	0.93	$	0.56
Diluted	$	0.30	$	0.18	$	0.91	$	0.54

The Company operates in two segments, transportation and e-commerce. The Company generates revenue in the transportation segment, primarily by providing truckload-hauling services through its subsidiaries Celadon Trucking Services Inc. ("CTSI"), Servicios de Transportacion Jaguar, S.A. de C.V., ("Jaguar"), and Celadon Canada, Inc. ("CelCan"). The Company provides certain services over the Internet through its e-commerce subsidiary TruckersB2B, Inc. ("TruckersB2B"). The e-commerce segment generates revenue by providing discounted fuel, tires, and other products and services to small and medium-sized trucking companies. The Company evaluates the performance of its operating segments based on operating income (amounts below in thousands).

	Transportation		E-commerce		Consolidated

Three months ended March 31, 2006
Operating revenue	$	113,231	$	2,082	$	115,313
Operating income		7,547		419		7,966

Three months ended March 31, 2005
Operating revenue	$	106,663	$	1,870	$	108,533
Operating income		4,985		339		5,324

Nine months ended March 31, 2006
Operating revenue	$	347,383	$	6,139	$	353,522
Operating income		22,705		1,133		23,838

Nine months ended March 31, 2005
Operating revenue	$	314,000	$	5,797	$	319,797
Operating income		14,721		1,190		15,911

In December 2004, the FASB issued Statement of Financial Accounting Standards ("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. 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 third quarter of fiscal 2006 and the nine months ended March 31, 2006.

At March 31, 2006, the Company had 1,019,411 outstanding stock options with an average exercise price of $10.87. There are 568,220 vested options. The stock options have an intrinsic value of $11.2 million based on the March 31, 2006 closing share price of $21.89. The weighted average remaining contractual term on these options is approximately 6.6 years. The total remaining unrecognized compensation cost related to the unvested options is $3.6 million which is expected to be recognized over approximately 3 years. During the third quarter ended March 31, 2006, $282,240 was expensed related to this plan in salaries, wages, and employee benefits.

At March 31, 2006, the Company had 182,820 outstanding nonvested shares with an average exercise price of $13.45. There are 47,100 vested shares. The nonvested shares have an intrinsic value of $1.5 million based on the March 31, 2006 closing share price of $21.89. The weighted average remaining contractual term on these shares is approximately 2.7 years. The total remaining unrecognized compensation cost related to the nonvested shares is $1.9 million which is expected to be recognized over approximately 4 years. During the third quarter ended March 31, 2006, $140,638 was expensed related to this plan, and $328,304 was expensed for the nine months ended of the same period in salaries, wages, and employee benefits.

The Company had 389,771 stock appreciation rights ("SARs") outstanding with an average exercise price of $11.57. These SARs vest annually over a 3 or 4 year term based on grant dates, with grant dates ranging from June 9, 2003 to August 21, 2005. These SARs have an intrinsic value of $4.0 million based on the March 31, 2006 closing share price of $21.89. The weighted average remaining contractual term on these SARs is approximately 2 years. SARs are classified as a liability award and recorded as other accrued expenses. During the third quarter ended March 31, 2006, $312,565 was expenses related to this plan, and $1,949,157 was expensed for the nine months ended of the same period.

	For the three months ended		For the nine months ended
	March 31, 2005		March 31, 2005

Net income	$	2,742	$	8,266
Stock-based compensation expense (net of tax)		54		213
Pro forma net income	$	2,688	$	8,053
Income per share:
Diluted earnings per share
As reported	$	0.18	$	0.54
Pro forma	$	0.17	$	0.53
Basic earnings per share:
As reported	$	0.18	$	0.56
Pro forma	$	0.18	$	0.54

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 to this Quarterly Report on Form 10-Q.

All such forward-looking statements speak only as of the date of this Quarterly Report on 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 North America. 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.

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 acquisition of certain assets of 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 CX Roberson acquisition was important to us, and we believe it has contributed to our recent operating improvements.

For the third quarter of fiscal 2006, operating revenue increased 6.3% to $115.3 million, compared with $108.5 million for the third quarter of fiscal 2005. Net income increased to $4.7 million from $2.7 million, and diluted earnings per share improved to $0.30 from $0.18. 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 third quarter of fiscal 2006 compared to the third quarter of fiscal 2005.

	For the three months ended March 31,						For the nine months ended March 31,
	2006			2005			2006			2005
Freight revenue⁽¹⁾		100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
Salaries, wages, and employee benefits		35.4	%		33.3	%		34.5	%		33.5	%
Fuel⁽¹⁾		10.7	%		11.9	%		10.7	%		11.1	%
Operations and maintenance		7.0	%		8.3	%		7.1	%		8.9	%
Insurance and claims		3.6	%		3.6	%		3.6	%		3.4	%
Depreciation and amortization		3.2	%		4.0	%		3.0	%		3.7	%
Revenue equipment rentals		9.6	%		9.1	%		9.9	%		8.7	%
Purchased transportation		16.1	%		17.5	%		16.9	%		18.8	%
Costs of products and services sold		1.3	%		1.2	%		1.3	%		1.2	%
Professional and consulting fees		0.6	%		0.8	%		0.7	%		0.6	%
Communications and utilities		1.0	%		1.1	%		1.0	%		1.1	%
Operating taxes and licenses		1.9	%		2.2	%		2.0	%		2.2	%
General and other operating		1.7	%		1.6	%		1.5	%		1.4	%

Total operating expenses		92.1	%		94.6	%		92.2	%		94.6	%

Operating income		7.9	%		5.4	%		7.8	%		5.4	%

Other expense:
Interest expense		0.2	%		0.4	%		0.2	%		0.4	%

Income before income taxes		7.7	%		5.0	%		7.6	%		5.0	%
Provision for income taxes		3.1	%		2.2	%		2.9	%		2.2	%

Net income		4.6	%		2.8	%		4.7	%		2.8	%

Operating revenue increased by $6.8 million, or 6.2%, to $115.3 million for the third quarter of fiscal 2006, from $108.5 million for the third quarter of fiscal 2005. Freight revenue increased by $1.6 million, or 1.7%, to $100.8 million for the third quarter of fiscal 2006, from $99.2 million for the third quarter of fiscal 2005. This increase was primarily attributable to a 3.0% improvement in average freight revenue per total mile to $1.36 from $1.32, with the average miles per tractor per week increasing from 2,069 miles to 2,118 miles. The improvement in average revenue per total mile resulted primarily from better overall freight rates driven by a favorable relationship between freight demand and truckload capacity. As a result of the foregoing factors, average freight revenue per tractor per week, which is our primary measure of asset productivity, increased 5.2% to $2,883 in the third quarter of fiscal 2006, from $2,740 for the third quarter of fiscal 2005. Revenue for TruckersB2B was $2.1 million in the third quarter of fiscal 2006, compared to $1.9 million for the third quarter of fiscal 2005.

Salaries, wages, and benefits were $35.7 million, or 35.4% of freight revenue, for the third quarter of fiscal 2006, compared to $33.0 million, or 33.3% of freight revenue, for the third quarter of fiscal 2005. The increase in the overall dollar amount was primarily related to an increase in driver payroll resulting from an increase in Company miles. The Company is required to record adjustments to reflect changes in the stock price for stock appreciation rights (“SARS”). Accordingly, our salaries, wages, and benefits will fluctuate as our stock price changes.

Fuel expenses, net of fuel surcharge revenue of $14.5 million and $9.3 million for the third quarter of fiscal 2006 and 2005, respectively, decreased to $10.8 million, or 10.7% of freight revenue, for the third quarter of fiscal 2006, compared to $11.8 million, or 11.9% of freight revenue, for the third quarter of fiscal 2005. This decrease was primarily attributable to average fuel prices that were approximately $2.30 per gallon, or 17.0% higher during the third quarter of fiscal 2006, and an increase in Company miles, which in turn increased fuel usage. The increase in fuel costs, however, was offset by fuel surcharge revenue. Increased fuel prices will increase our operating expenses to the extent they are not offset by surcharges.

Operations and maintenance decreased to $7.1 million for the third quarter of fiscal 2006, from $8.3 million for the third quarter of fiscal 2005. Operations and maintenance decreased to 7.0% of freight revenue, for the third quarter of fiscal 2006, from 8.3% for the third quarter of fiscal 2005. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. Expenses to prepare tractors for trade-in or sale have decreased as we have changed our trade cycle from 4 years to 3 years and the reduction in the average age of tractors and trailers has decreased our repairs. We expect maintenance expense to decrease as a percentage of revenue in future periods as a result of the effects of our fleet upgrade.

Insurance and claims expense was constant at $3.6 million, or 3.6% of freight revenue, for the third quarter of fiscal 2006 and 2005. Insurance consists of premiums 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. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $3.2 million from $3.9 million for the third quarter of fiscal 2006, compared to the third quarter of fiscal 2005. Depreciation and amortization decreased to 3.2% of freight revenue in the third quarter of fiscal 2006, compared to 4.0% of freight revenue for the third quarter of fiscal 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 financed with borrowings or capital leases. In the near term we expect to purchase new tractors with cash generated from operations.

Revenue equipment rentals were $9.7 million, or 9.6% of freight revenue, for the third quarter of fiscal 2006, compared to $9.0 million or 9.1% of freight revenue for the third quarter of fiscal 2005. This increase is attributable to an increase in our trailer fleet financed under operating leases. At March 31, 2006, 6,208 trailers, or 83.2% of our Company trailers, were held under operating leases compared to 5,389 trailers, or 68.3% of our trailers, at March 31, 2005. As we expect to finance most of our new trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to slightly increase going forward, but at a slower rate as we are now purchasing new tractors with cash generated from operations.

Purchased transportation decreased to $16.3 million, or 16.1% of freight revenue, for the third quarter of fiscal 2006, from $17.3 million, or 17.5% of freight revenue, for the third quarter of fiscal 2005. The decrease is primarily related to reduced owner-operator expense, as the percentage of our fleet comprised of owner-operators decreased. It has become difficult to recruit and retain owner-operators due to the challenging operating environment. Owner-operators are independent contractors who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. To the extent these operating expenses continue to rise and there is not a corresponding increase in the fixed payment per mile, we expect the percentage of our fleet comprised of owner-operators will continue to decrease.

Income taxes increased to $3.1 million, with an effective tax rate of 39.9%, for the third quarter of fiscal 2006, from $2.2 million, with an effective tax rate of 44.2%, for the third quarter of fiscal 2005. The effective tax rate decreased as a result of increased earnings which reduced the effect of non-deductible expenses related to our per diem pay structure. As per diem is a non-deductible expense, our effective tax rate will fluctuate as net income fluctuates in the future.

Operating revenue increased by $33.7million, or 10.5%, to $353.5 million for the nine months ended March 31, 2006, from $319.8 million for the nine months ended March 31, 2005. This increase was primarily attributable to a 5.4% improvement in average freight revenue per total mile, from $1.31 to $1.37, with the average miles per tractor per week remaining constant at 2,151. The improvement in average revenue per total mile resulted primarily from better overall freight rates driven by a favorable relationship between freight demand and truckload capacity. As a result of the foregoing factors, average freight revenue per tractor per week, which is our primary measure of asset productivity, increased 4.6% to $2,938 for the nine months ended March 31, 2006, from $2,808 for the nine months ended March 31, 2005. Revenue for TruckersB2B was $6.1 million for the nine months ended March 31, 2006, compared to $5.8 million for the nine months ended March 31, 2005.

Salaries, wages, and benefits were $106.0 million, or 34.5% of freight revenue, for the nine months ended March 31, 2006, compared to $98.6 million, or 33.5% of freight revenue, for the nine months ended March 31, 2005. The increase in the overall dollar amount was primarily related to an increase in driver payroll resulting from an increase in Company miles and adjusting the Company’s accrual for outstanding SARs due to an increase in the Company’s stock price. The Company is required to make quarterly adjustments to reflect changes in the stock price. Accordingly, our salaries, wages, and benefits will fluctuate as our stock price changes.

Fuel expenses, net of fuel surcharge revenue of $46.5 million and $25.1 million for the nine months ended March 31, 2006 and 2005, respectively, increased to $33.0 million, or 10.7% of freight revenue, for the nine months ended March 31, 2006, compared to $32.7 million, or 11.1% of freight revenue, for the nine months ended March 31, 2005. The increase in our costs was attributable to average fuel prices that were approximately $2.41 per gallon, or 30.5% higher during the nine months ended March 31, 2006, and an increase in Company miles. The increase in fuel prices was offset by the collection of fuel surcharge revenue. Increased fuel prices will increase our operating expenses to the extent they are not offset by surcharges.

Operations and maintenance decreased to $21.8 million for the nine months ended March 31, 2006, from $26.1 million for the nine months ended March 31, 2005. As a percentage of freight revenue, operations and maintenance decreased to 7.1% for the nine months ended March 31, 2006, from 8.9% for the nine months ended March 31, 2005. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. Expenses to prepare tractors for trade-in or sale have decreased as we have changed our trade cycle from 4 years to 3 years and the reduction in the average age of tractors and trailers has decreased our repairs. We expect maintenance expense to decrease as a percentage of revenue in future periods as a result of the effects of our fleet upgrade.

Insurance and claims expense was $11.0 million, or 3.6% of freight revenue, for the nine months ended March 31, 2006, compared to $9.9 million, or 3.4% of freight revenue, for the nine months ended March 31, 2005. The primary reasons for the increase in insurance and claims were slightly higher cargo claims, workers’ compensation expenses, and increased legal expenses incurred in defense and settlement of various cases. Insurance consists of premiums 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. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $9.3 million, or 3.0% of freight revenue, for the nine months ended March 31, 2006, from $10.9 million, or 3.7% of freight revenue, for the nine months ended March 31, 2005. The decrease in depreciation expense is attributed to equipment sold in fiscal year 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 financed with borrowings or capital leases. In the near term we expect to purchase new tractors with cash generated from operations.

Revenue equipment rentals were $30.3 million, or 9.9% of freight revenue, for the nine months ended March 31, 2006, compared to $25.6 million, or 8.7% of freight revenue for the nine months ended March 31, 2005. This increase is attributable to an increased percentage of our trailer fleet held under operating leases for the nine months ended March 31, 2006. At March 31, 2006, 6,208 trailers, or 83.2% of our Company trailers, were held under operating leases compared to 5,389 trailers, or 68.3% of our trailers, at March 31, 2005. As we expect to finance most of our new trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to increase going forward, but at a slower rate as we are purchasing tractors using cash generated from operations.

Purchased transportation decreased to $51.9 million, or 16.9% of freight revenue, for the nine months ended March 31, 2006, from $55.4 million, or 18.8% of freight revenue, for the nine months ended March 31, 2005. The decrease is primarily related to reduced owner-operator expense, as the percentage of our fleet comprised of owner-operators decreased. It has become difficult to recruit and retain owner-operators due to the challenging operating environment. Owner-operators are independent contractors who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. To the extent these operating expenses continue to rise and there is not a corresponding increase in the fixed payment per mile, we expect the percentage of our fleet comprised of owner-operators will continue to decrease.

Trucking is a capital-intensive business. We require cash to fund our operating expenses (other than depreciation and amortization), to make capital expenditures, acquisitions, and to repay debt. 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, 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.

Cash provided by operations was $20.1 million for the nine months ended March 31, 2006, compared to $24.2 million for the nine months ended March 31, 2005. The primary changes in operating assets and liabilities related to increased prepaid expenses due to payment of fiscal 2006 insurance premiums at the beginning of the year whereas installment payments were made historically, prepayment of heavy vehicle use tax (historically paid quarterly), and payment on license renewals, as well as a decrease in accounts payable and accrued expenses due to settlement of many large liability claims.

Investing activities consumed $15.0 million for the nine months ended March 31, 2006, compared to $26.7 million for the nine months ended March 31, 2005. Capital expenditures were $47.4 million for the nine months ended March 31, 2006, primarily related to the purchase of 548 tractors and 346 trailers (from lease buyouts and new equipment purchases). Capital expenditures were $23.1 million for the nine months ended March 31, 2005, primarily related to the purchase of 21 tractors and 621 trailers (from lease buyouts and new equipment purchases). Proceeds from the sale of property and equipment were $32.4 million and $21.6 million for the nine months ended March 31, 2006 and March 31, 2005, respectively, related to assets retired when new equipment was purchased.

Financing activities consumed $1.0 million for the nine months ended March 31, 2006, compared to cash provided of $2.8 million for the nine months ended March 31, 2005. Financing activity represents borrowings (new borrowings, net of repayment) and payments of the principal component of capital lease obligations. Although capital expenditures increased for the nine months ended March 31, 2006, we used cash on hand for a greater percentage of our financing activities, rather than borrowing.

Prior to our fiscal 2006 purchase of new tractors with cash generated from operations, we historically have financed many 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. At March 31, 2006, we had future operating lease obligations totaling $199.7 million, including residual value guarantees of approximately $79.1 million. We were obligated for residual value payments related to operating leases of $79.1 million and $62.6 million at March 31, 2006 and 2005, 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 in the short term we will continue to use operating leases to finance the acquisition of trailers and we will use cash generated from operations to purchase tractors.

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.

On September 26, 2005, the Company, CTSI, and TruckersB2B entered into an unsecured Credit Agreement with LaSalle Bank National Association, as administrative agent, and LaSalle Bank National Association, Fifth Third Bank (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures on September 24, 2010 (the "Credit Agreement"). The Credit Agreement was used to refinance the Company’s existing credit facility and is intended to provide for ongoing working capital needs and general corporate purposes. Borrowings under the Credit Agreement are based, at the option of the Company, on a base rate equal to the greater of the federal funds rate plus 0.5% and the administrative agent’s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125% that is adjusted quarterly based on cash flow coverage. The Credit Agreement is guaranteed by Celadon E-Commerce, Inc., CelCan, and Jaguar, each of which is a subsidiary of the Company.

The Credit Agreement has a maximum revolving borrowing limit of $50.0 million, and the Company may increase the revolving borrowing limit by an additional $20.0 million, to a total of $70.0 million. Letters of credit are limited to an aggregate commitment of $15.0 million and a swing line facility has a limit of $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and 0.225% per annum based on cash flow coverage is due on the daily unused portion of the Credit Agreement. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, mergers, consolidations, acquisitions and dispositions, and total indebtedness. We were in compliance with these covenants at March 31, 2006, and expect to remain in compliance for the foreseeable future. At March 31, 2006, none of our credit facility was utilized as outstanding borrowings and $5.6 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 March 31, 2006 (in thousands) Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Operating lease obligations	$	120,627	$	38,341	$	42,523	$	21,427	$	18,336
Lease residual value guarantees		79,121		14,195		32,161		5,261		27,503
Capital lease obligations⁽¹⁾		1,717		382		671		665		---
Long-term debt⁽¹⁾⁽¹⁾		6,726		1,260		4,204		1,262		---
Sub-total	$	208,191	$	54,178	$	79,559	$	28,615	$	45,839

Future purchase of revenue equipment	$	90,826	$	35,234	$	48,988	$	1,597	$	5,006
Employment and consulting agreements⁽²⁾		1,142		891		251		---		---
Standby Letters of Credit		5,600		5,600		---		---		---

Total	$	305,759	$	95,903	$	128,798	$	30,212	$	50,845

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 nine months ended March 31, 2006 (both in terms of amount and currency mix), we estimate that a $0.01 increase in the Canadian dollar exchange rate would reduce our annual net income by approximately $232,000.

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 nine months ended March 31, 2006 (both in terms of amount and currency mix), we estimate that a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net income by approximately $63,000.

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 March 31, 2006, we had no currency 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. There were no changes in the Company’s internal control over financial reporting that occurred during the third quarter of fiscal 2006 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. 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.

The Company held its regular Annual Meeting of Stockholders (the "Annual Meeting") on January 12, 2006. At the Annual Meeting, stockholders representing 9,203,579 shares or 91.27% of the total outstanding shares of Common Stock were present in person or by proxy at the Annual Meeting and voted on three proposals. All share numbers set forth in this Item 4 have not been adjusted to give effect to our three-for-two stock dividend declared on January 18, 2006. A tabulation of the votes with respect to each proposal follows:

3.1	Amended and Restated Certificate of Incorporation of the Company. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2005, filed with the SEC on January 30, 2006.)
3.2	Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
3.3	By-laws. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
4.1	Amended and Restated Certificate of Incorporation of the Company.
4.2	Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
4.3	Rights Agreement, dated as of July 20, 2000, between Celadon Group, Inc. and Fleet National Bank, as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed with the SEC on July 20, 2000.)
4.4	By-laws. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
10.22	Celadon Group, Inc., 2006 Omnibus Incentive Plan. (Incorporated by reference to Annex A to the Company’s definitive proxy statement, filed with the SEC on December 19, 2005.)
10.23	Celadon Group, Inc. Award Notice for Employees for Restricted Stock Awards.*

10.24	Celadon Group, Inc. Award Notice for Stephen Russell for Restricted Stock Award.*
10.25	Celadon Group, Inc. Award Notice for Employees for Incentive Stock Option Grants.*
10.26	Celadon Group, Inc. Award Notice for Non-Employee Directors for Non-Qualified Stock Option Grants.*
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 Will, the Company’s Chief Financial Officer.*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company’s Chief Executive Officer.*
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Paul Will, the Company’s Chief Financial Officer.*
99	Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements.*
________________________
* Filed herewith

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

9503 East 33^rd Street
One Celadon Drive
Indianapolis, IN	46235-4207
(Address of principal executive offices)	(Zip Code)

(317) 972-7000 (Registrant’s telephone number)

	March 31, 2006				March 31, 2005
	Tractors		Trailers		Tractors		Trailers
Owned equipment		509		1,144		520		2,020
Capital leased equipment		---		110		20		476
Operating leased equipment		1,715		6,208		1,674		5,389
Independent contractors		347		---		414		---
Total		2,571		7,462		2,628		7,885

	Voted For	Vote Withheld
Stephen Russell	8,059,998	1,143,581
Paul A. Biddelman	8,061,287	1,142,292
Michael Miller	8,239,928	963,651
Anthony Heyworth	8,033,237	1,170,342

	Voted For		Voted Against		Abstain
	6,407,845		1,014,819		10,415

	Voted For		Voted Against		Abstain
	5,288,807		3,904,527		10,245

	Three months ended March 31,					Nine months ended March 31,
	2006			2005		2006			2005

Net income	$	4,677		$	2,742	$	14,160		$	8,266

Foreign currency translation adjustments		(509	)		---		(191	)		165

Total comprehensive income	$	4,168		$	2,742	$	13,969		$	8,431

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

	Celadon Group, Inc.
	(Registrant)

	/s/ Stephen Russell
	Stephen Russell
	Chairman of the Board and Chief Executive Officer


	/s/ Paul Will
	Paul Will
	Chief Financial Officer, Executive Vice President, Treasurer, and Assistant Secretary

Date: May 4, 2006