================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

      (Mark One )

      |X|   Quarterly report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

      For the quarterly period ended December 31, 1998 or

      |_|   Transition report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

      For the transition period from ______________ to ______________

      Commission file number 0-24247
                             -------

                      ATLANTIC EXPRESS TRANSPORTATION CORP.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

              New York                                  13-392-3467
-------------------------------------       -----------------------------------
   (State or Other Jurisdiction of                   (I.R.S. Employer
    Incorporation or Organization)                  Identification No.)

               7 North Street, Staten Island, New York, 10302-1205
--------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

                                 (718) 442-7000
--------------------------------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)


--------------------------------------------------------------------------------
         (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. 
Yes |X|  No |_| 

                   APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
                        BANKRUPTCY PROCEEDINGS DURING THE
                              PRECEDING FIVE YEARS

      Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 
Yes |_| No |_| 

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

100 Shares of Common Stock, no par value.

================================================================================
<PAGE>

                                    TABLE OF CONTENTS

PART I. Financial Information

                                                                           Page
                                                                           -----
    ITEM 1. Financial Statements:

    Consolidated Balance Sheets at June 30, 1998 (audited) and
      December 31, 1998 (unaudited)...................................       1

    Consolidated Statements of Operations for the Three Month
      and Six Month Periods Ended December 31, 1997 (unaudited) 
      and 1998 (unaudited)............................................       2

    Consolidated Statements of Comprehensive Income (Loss) for
      the Three Months and Six Months Ended December 31, 1997 
      (unaudited) and 1998 (unaudited)................................       3

    Consolidated Statements of Cash Flows for the Six Month Periods 
      Ended December 31, 1997 (unaudited) and 1998 (unaudited)........       4

    Notes to Consolidated Financial Statements (unaudited)............     5-8

    ITEM 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations.............................    9-12

PART II. Other Information                                                  13

Signatures............................................................      14

Index to Exhibits.....................................................     E-1
<PAGE>

             Atlantic Express Transportation Corp. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                             June 30,     December 31,
                                                                                               1998           1998
                                                                                           ------------   ------------
                                                                                             (audited)     (unaudited)
<S>                                                                                        <C>            <C>         
Assets
Current:
     Cash and cash equivalents .........................................................   $ 13,772,537   $  2,491,118
     Current portion of marketable securities ..........................................        850,000      2,700,000
     Accounts receivable, net of allowance for doubtful accounts .......................     37,310,006     40,962,184
     Inventories .......................................................................     10,762,839      9,913,095
     Notes receivable ..................................................................      1,182,425        124,839
     Prepaid expenses and other current assets .........................................      5,692,610      6,990,474
                                                                                           ------------   ------------
               Total current assets ....................................................     69,570,417     63,181,710
                                                                                           ------------   ------------
Property, plant and equipment, less accumulated depreciation ...........................     99,887,054    125,345,670
                                                                                           ------------   ------------
Other assets:
     Goodwill, net .....................................................................     12,469,422     12,306,468
     Notes receivable from affiliates ..................................................        510,000             --
     Investments .......................................................................        229,000        229,000
     Marketable securities .............................................................      7,027,937      7,450,835
     Deferred lease expense ............................................................        334,115        276,811
     Transportation contract rights, net ...............................................      3,807,743      8,955,742
     Deferred financing and organization costs, net ....................................      8,310,723      7,583,802
     Due from affiliates ...............................................................        672,589        831,117
     Notes receivable ..................................................................         25,000         22,339
     Deposit and other noncurrent assets ...............................................      1,394,301      1,721,051
     Deferred tax assets ...............................................................      2,087,000      4,464,809
     Covenant not to compete, net ......................................................        160,000        245,000
                                                                                           ------------   ------------
               Total other assets ......................................................     37,027,830     44,086,974
                                                                                           ------------   ------------
                                                                                           $206,485,301   $232,614,354
                                                                                           ============   ============
Liabilities and Stockholder's Equity
Current:
     Current portion of long-term debt .................................................   $    641,574   $  1,272,948
     Accounts payable ..................................................................      2,250,615      2,924,060
     Accrued compensation ..............................................................      4,703,334      4,457,427
     Current portion of insurance reserve ..............................................      3,657,442      3,760,000
     Accrued interest ..................................................................      6,776,630      6,899,913
     Other accrued expenses and current liabilities ....................................      4,158,333      3,592,410
                                                                                           ------------   ------------
               Total current liabilities ...............................................     22,187,928     22,906,758
                                                                                           ------------   ------------
Long-term debt, net of current portion .................................................    157,284,116    181,246,282
                                                                                           ------------   ------------
Premium on bond issuance ...............................................................      1,202,550      1,094,850
                                                                                           ------------   ------------
Other long-term liabilities ............................................................      5,641,135      7,116,526
                                                                                           ------------   ------------

Stockholder's equity:
     Common stock, no par value - shares authorized 200; issued and outstanding 100 ....        250,000        250,000
     Additional paid-in capital ........................................................     13,188,926     15,898,517
     Retained earnings .................................................................      6,354,353      2,773,750
     Accumulated other comprehensive income:
          Unrealized gain on marketable securities, net ................................        376,293      1,327,671
                                                                                           ------------   ------------
               Total stockholder's equity ..............................................     20,169,572     20,249,938
                                                                                           ------------   ------------
                                                                                           $206,485,301   $232,614,354
                                                                                           ============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       1
<PAGE>

             Atlantic Express Transportation Corp. and Subsidiaries

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                        Three Months Ended                 Six Months Ended
                                                            December 31,                      December 31,
                                                   ------------------------------    ------------------------------
                                                       1997             1998             1997             1998
                                                   -------------    -------------    -------------    -------------
                                                            (unaudited)                       (unaudited)
<S>                                                <C>              <C>              <C>              <C>          
Revenues .......................................   $  68,138,099    $  84,968,315    $ 127,291,475    $ 156,001,102
                                                   -------------    -------------    -------------    -------------
Costs and expenses:
     Cost of operations ........................      57,915,037       68,403,973      109,169,121      133,060,046
     General and administrative ................       7,000,890        5,606,220       10,773,210       10,190,642
     Depreciation and amortization .............       3,419,061        3,123,996        6,711,340        5,979,982
                                                   -------------    -------------    -------------    -------------
                                                      68,334,988       77,134,189      126,653,671      149,230,670
                                                   -------------    -------------    -------------    -------------
          Income (loss) from operations ........        (196,889)       7,834,126          637,804        6,770,432
Interest .......................................      (4,919,498)      (5,263,970)      (9,057,169)     (10,081,573)
Other income (expense) .........................         124,748          (72,999)         232,902          (72,999)
                                                   -------------    -------------    -------------    -------------
          Income (loss) before nonrecurring
             item and benefit for income
             taxes .............................      (4,991,639)       2,497,157       (8,186,463)      (3,384,140)
Nonrecurring item ..............................              --       (2,709,591)              --       (2,709,591)
                                                   -------------    -------------    -------------    -------------
          Loss before benefit for income
             taxes .............................      (4,991,639)        (212,434)      (8,186,463)      (6,093,731)
Benefit for income taxes .......................      (2,342,083)         (95,595)      (3,683,910)      (2,742,178)
                                                   -------------    -------------    -------------    -------------
          Net loss .............................   $  (2,649,556)   $    (116,839)   $  (4,502,553)   $  (3,351,553)
                                                   =============    =============    =============    =============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

             Atlantic Express Transportation Corp. and Subsidiaries

             Consolidated Statements of Comprehensive Income (Loss)

<TABLE>
<CAPTION>
                                                   Three Months Ended             Six Months Ended
                                                       December 31,                  December 31,
                                               --------------------------    --------------------------
                                                  1997           1998           1997           1998
                                               -----------    -----------    -----------    -----------
                                                       (unaudited)                   (unaudited)
<S>                                            <C>            <C>            <C>            <C>         
Net loss ...................................   $(2,649,556)   $  (116,839)   $(4,502,553)   $(3,351,553)

Other comprehensive income (loss):
     Unrealized gain (loss) on marketable
          securities .......................      (168,528)     1,561,228         86,357        951,378
                                               -----------    -----------    -----------    -----------
Comprehensive income (loss) ................   $(2,818,084)   $ 1,444,389    $(4,416,196)   $(2,400,175)
                                               ===========    ===========    ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

             Atlantic Express Transportation Corp. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                             Six Months Ended
                                                                                                December 31,
                                                                                       ----------------------------
                                                                                           1997            1998
                                                                                       ------------    ------------
                                                                                                (unaudited)
<S>                                                                                    <C>             <C>          
Cash flows from operating activities:
     Net income (loss) .............................................................   $ (4,502,553)   $ (3,351,553)
Adjustments to reconcile net loss to net cash provided by operating activities:
          Gain on sale of marketable securities ....................................       (232,902)       (194,329)
          Deferred income taxes ....................................................     (3,683,860)     (2,742,178)
          Depreciation .............................................................      5,857,519       5,401,850
          Amortization .............................................................      1,835,166       1,205,624
          Write-off of accounts receivable .........................................        480,000              --
          Reserve for doubtful accounts receivable .................................      1,270,000          60,000
          Interest accrued on notes receivable .....................................       (157,775)             --
          Transfer from restricted cash ............................................        914,408              --
          Nonrecurring item ........................................................             --       2,709,591
          Decrease (increase) in:
               Accounts receivable and retainage (net of receivables sold) .........       (575,882)     (3,092,168)
               Inventories .........................................................      1,557,316       1,014,617
               Prepaid expenses and other current assets ...........................     (2,646,982)     (1,209,744)
               Deferred lease expense ..............................................         75,202          57,304
               Deposits and other noncurrent assets ................................       (113,901)        200,699
          Increase (decrease) in:
               Accounts payable ....................................................       (388,852)        595,259
               Accrued expenses and other current liabilities ......................      5,429,580      (1,975,650)
               Other long-term liabilities .........................................        752,364         475,390
                                                                                       ------------    ------------
               Net cash provided (used in) operating activities ....................      5,868,848        (845,288)
                                                                                       ------------    ------------
Cash flows from investing activities:
     Acquisition of subsidiaries (net of cash acquired of $207,441 and $1,100,009
          in 1997 and 1998 respectively) ...........................................    (21,519,397)     (6,014,361)
     Proceeds from sale of fixed assets ............................................        234,064          33,887
     Additions to property, plant and equipment ....................................    (15,426,604)    (18,745,242)
     Purchase of transportation contract rights ....................................        (39,665)        (70,215)
     Due from affiliates ...........................................................       (564,422)       (158,528)
     Notes receivable ..............................................................       (643,042)      1,570,247
     Marketable securities sold (purchased), net ...................................     (2,167,328)     (1,127,191)
                                                                                       ------------    ------------
               Net cash used in investing activities ...............................    (40,126,394)    (24,511,403)
                                                                                       ------------    ------------

Cash flows from financing activities:
     Proceeds of additional borrowings .............................................     45,770,000      19,355,307
     Principal payments on borrowings ..............................................    (13,252,118)     (5,000,991)
     Deferred financing and organization costs .....................................     (3,567,213)        (49,995)
     Other .........................................................................       (379,756)       (229,049)
                                                                                       ------------    ------------
          Net cash provided by financing activities ................................     28,570,913      14,075,272
                                                                                       ------------    ------------
Net decrease in cash and cash equivalents ..........................................     (5,686,633)    (11,281,419)
Cash and cash equivalents, beginning of period .....................................     16,818,889      13,772,537
                                                                                       ------------    ------------
Cash and cash equivalents, end of period ...........................................   $ 11,132,256    $  2,491,118
                                                                                       ============    ============

Supplemental disclosures of cash flow information: Cash paid during the period
     for:
          Interest .................................................................   $  6,320,900    $  9,521,069
          Income taxes .............................................................        331,527         182,068

Supplemental schedule of noncash investing and financing activities:
     Loans incurred for purchase of property, plant and equipment ..................   $  6,368,900    $  5,686,617
     Liability incurred for acquisition of contract rights .........................             --       1,000,000
     Additional paid-in capital contributed ........................................             --       2,709,591
     Transfer of bus from inventory to fixed assets ................................         47,558              --
</TABLE>

                See accompanying notes to financial statements.


                                       4
<PAGE>

             Atlantic Express Transportation Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements

1.    Basis of Accounting

            These consolidated financial statements should be read in
      conjunction with the consolidated financial statements and related notes
      contained in the Company's financial statements as of and for the year
      ended June 30, 1998 as filed on Form 10-K. In the opinion of management,
      all adjustments and accruals (consisting only of normal recurring
      adjustments) which are necessary for a fair presentation of operating
      results are reflected in the accompanying financial statements.

            Certain amounts in the fiscal 1998 financial statements have been
      reclassified to conform with current period presentation.

            Operating results for the periods presented are not necessarily
      indicative of the results for the full fiscal year.

2.    New Accounting Pronouncement

      Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires that all components of comprehensive
income (loss) and total comprehensive income (loss) be reported on one of the
following: a statement of income and comprehensive income (loss), a statement of
comprehensive income (loss) or a statement of stockholder's equity. The Company
is reporting this information on a separate statement of comprehensive income
(loss) which includes all changes to stockholder's equity, except those due to
investments by owners (changes in paid in capital) and distributions to owners
(dividends). This statement did not change the current accounting treatment for
components of comprehensive income.

3.    Inventories

            Inventories comprised the following:

                                                 June 30,      December 31,
                                                   1998           1998
                                                -----------    -----------
            Parts and fuel.....................  $3,921,237     $4,105,675
            Buses..............................   6,841,602      5,807,420
                                                -----------    -----------
                                                $10,762,839    $ 9,913,095
                                                ===========    ===========

4.    Change of Control of the Company and Nonrecurring Item

      On October 27, 1998 the holders of a majority in principal amount of the
Company's 10 3/4% Senior Secured Notes due 2004 (the "Notes") consented to an
amendment to the Indenture relating to the Notes which in substance exempted the
transactions contemplated by a Recapitalization and Stock Purchase Agreement
(the "Recapitalization") from the definition of "Change of Control" under the
Indenture. On November 4, 1998 the Recapitalization was consummated. As a
result, GSCP II Holdings (AE), LLC, an affiliate of Greenwich Street Capital
Partners, Inc., a New York based private equity fund, acquired an approximately
88% equity interest in a recapitalized Atlantic Express Transportation Group,
Inc. ("AETG") which owns all of the issued and outstanding shares of capital
stock of the Company.

      $2.7 million of fees and expenses paid by the stockholders of AETG in
connection with the amendment to the Indenture have been recorded as a
nonrecurring charge with a corresponding contribution to additional paid in
capital.


                                       5
<PAGE>

5.    Supplemental Financial Information

      The following are unaudited condensed consolidating financial statements
regarding the Company (on a stand-alone basis and on a consolidated basis) and
its subsidiaries which are Guarantors and Non-Guarantors of the Notes as of and
for the six months ended December 31, 1998, and a consolidating balance sheet as
of June 30, 1998 and consolidating statements of operations for the three months
ended December 31, 1998 and 1997 and for the six months ended December 31, 1997,
and consolidating statement of cash flows for the six months ended December 31,
1997.

                      Condensed Consolidating Balance Sheet
                                December 31, 1998

<TABLE>
<CAPTION>
                                              Atlantic
                                              Express                              Non-   
                                           Transportation      Guarantor        Guarantors      Elimination
                                                Corp.         Subsidiaries     Subsidiaries        Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Current assets .........................   $    2,911,199    $   58,353,400   $    6,568,262   $   (4,651,151)   $   63,181,710
Investment in affiliates ...............       68,340,331                --               --      (68,340,331)               --
Total assets ...........................      215,736,244       189,048,763       14,788,778     (186,959,431)      232,614,354
Current liabilities ....................        8,035,215        14,878,354        4,685,458       (4,692,269)       22,906,758
Total liabilities ......................      179,950,126       162,386,314       10,731,984     (140,704,008)      212,364,416
Stockholder's equity ...................       35,786,118        26,662,449        4,056,794      (46,255,423)       20,249,938
</TABLE>

                 Condensed Consolidating Statement of Operations
                      Three months ended December 31, 1998

<TABLE>
<CAPTION>
                                              Atlantic
                                              Express
                                           Transportation      Guarantor           Non-         Elimination
                                                Corp.         Subsidiaries      Guarantors        Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net revenues ...........................   $           --    $   84,667,851   $    2,273,552   $   (1,973,088)   $   84,968,315
Income (loss) from operations ..........         (267,415)        7,853,713          247,828               --         7,834,126
Income (loss) before nonrecurring
  item, (provision for) benefit from
  income taxes .........................         (267,415)        2,516,744          247,828               --         2,497,157
Nonrecurring item ......................       (2,709,591)               --               --               --        (2,709,591)
Net income of subsidiaries .............        1,520,514                --               --       (1,520,514)               --
Net income (loss) ......................         (116,839)        1,382,786          137,728       (1,520,514)         (116,839)
</TABLE>

                 Condensed Consolidating Statement of Operations
                       Six months ended December 31, 1998

<TABLE>
<CAPTION>
                                              Atlantic
                                              Express
                                           Transportation      Guarantor           Non-         Elimination
                                                Corp.         Subsidiaries      Guarantors        Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net revenues ...........................   $           --    $  155,644,406   $    3,442,232   $   (3,085,536)   $  156,001,102
Income (loss) from operations ..........         (320,906)        6,829,282          262,056               --         6,770,432
Income (loss) before nonrecurring
  item, (provision for) benefit from
  income taxes .........................         (320,906)       (3,325,290)         262,056               --        (3,384,140)
Nonrecurring item ......................       (2,709,591)               --               --               --        (2,709,591)
Net loss of subsidiaries ...............       (1,684,780)               --               --        1,684,780                --
Net income (loss) ......................       (3,351,553)       (1,828,911)         144,131        1,684,780        (3,351,553)
</TABLE>


                                       6
<PAGE>

                 Condensed Consolidating Statement of Cash Flows
                       Six months ended December 31, 1998

<TABLE>
<CAPTION>
                                             Atlantic
                                              Express                              Non-
                                           Transportation      Guarantor         Guarantor      Elimination
                                                Corp.         Subsidiaries     Subsidiaries       Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net cash provided by (used in)
     operating activities ..............   $  (18,865,166)   $   15,950,730   $    2,069,148   $           --    $     (845,288)
Net cash used in investing
     activities ........................       (5,842,005)      (17,542,207)      (1,127,191)              --       (24,511,403)
Net cash provided by (used in)
     financing activities ..............       19,076,263        (5,000,991)              --               --        14,075,272
Increase (decrease) in cash and
     cash equivalents ..................       (5,630,908)       (6,592,468)         941,957               --       (11,281,419)
Cash and cash equivalents,
     beginning of period ...............        6,932,910         4,014,584        2,825,043               --        13,772,537
                                           ------------------------------------------------------------------------------------
Cash and cash equivalents,
     end of period .....................   $    1,302,002    $   (2,577,884)  $    3,767,000   $           --    $    2,491,118
</TABLE>

                      Condensed Consolidating Balance Sheet
                                  June 30, 1998

<TABLE>
<CAPTION>
                                             Atlantic
                                              Express                              Non-
                                           Transportation      Guarantor         Guarantor      Elimination
                                                Corp.         Subsidiaries     Subsidiaries       Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Current assets .........................   $   13,459,022    $   47,736,795   $    8,374,600   $           --    $   69,570,417
Investment in affiliates ...............       60,404,818                --               --      (60,404,818)               --
Total assets ...........................      193,219,371       165,426,379       15,993,943     (168,154,392)      206,485,301
Current liabilities ....................        7,688,435         6,743,371        7,756,122               --        22,187,928
Total liabilities ......................      160,355,739       120,676,905       13,032,657     (107,749,572)      186,315,729
Stockholder's equity ...................       32,863,632        44,749,474        2,961,286      (60,404,820)       20,169,572
</TABLE>

                 Condensed Consolidating Statement of Operations
                      Three months ended December 31, 1997

<TABLE>
<CAPTION>
                                             Atlantic
                                              Express                              Non-
                                           Transportation      Guarantor         Guarantor      Elimination
                                                Corp.         Subsidiaries     Subsidiaries       Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net revenues ...........................   $           --    $   68,138,099   $    2,520,904   $   (2,520,904)   $   68,138,099
Income (loss) from operations ..........               --          (140,130)         (56,759)              --          (196,889)
Income (loss) before income taxes ......               --        (5,157,648)         166,009               --        (4,991,639)
Net loss of subsidiaries ...............       (2,649,556)               --               --        2,649,556                --
Net income (loss) ......................       (2,649,556)       (2,740,861)          91,305        2,649,556        (2,649,556)
</TABLE>


                                       7
<PAGE>

                 Condensed Consolidating Statement of Operations
                       Six months ended December 31, 1997

<TABLE>
<CAPTION>
                                             Atlantic
                                              Express                              Non-
                                           Transportation      Guarantor         Guarantor      Elimination
                                                Corp.         Subsidiaries     Subsidiaries       Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net revenues ...........................   $           --    $  127,291,475   $    3,708,814   $   (3,708,814)   $  127,291,475
Income (loss) from operations ..........               --           736,314          (98,510)              --           637,804
Income (loss) before income taxes ......               --        (8,505,199)         318,736               --        (8,186,463)
Net loss of subsidiaries ...............       (4,502,553)               --               --        4,502,553                --
Net income (loss) ......................       (4,502,553)       (4,677,858)         175,305        4,502,553        (4,502,553)
</TABLE>

                 Condensed Consolidating Statement of Cash Flows
                       Six months ended December 31, 1997

<TABLE>
<CAPTION>
                                             Atlantic
                                              Express                              Non-
                                           Transportation      Guarantor         Guarantor      Elimination
                                                Corp.         Subsidiaries     Subsidiaries       Entries         Consolidated
                                           --------------    --------------   --------------   --------------    --------------
<S>                                        <C>               <C>              <C>              <C>               <C>           
Net cash provided by (used in)
     operating activities ..............   $  (24,399,331)   $   27,584,225   $    2,683,954   $           --    $    5,868,848
Net cash used in investing
     activities ........................      (22,223,082)      (15,735,984)      (2,167,328)              --       (40,126,394)
Net cash provided by (used in
     financing activities ..............       41,713,031       (13,142,118)              --               --        28,570,913
Increase (decrease) in cash and
     cash equivalents ..................       (4,909,382)       (1,293,877)         516,626               --        (5,686,633)
Cash and cash equivalents,
     beginning of  period ..............       15,029,114           479,933        1,309,842               --        16,818,889
                                           ------------------------------------------------------------------------------------
Cash and cash equivalents, end of
     period ............................   $   10,119,732    $     (813,944)  $    1,826,468               --    $   11,132,256
</TABLE>


                                       8
<PAGE>

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

      The following discussion contains forward-looking statements within the
meaning of the federal securities laws and as such involve known and unknown
risks and uncertainties. These statements may use forward-looking words such as
"anticipate", "estimate", "expect", "will" or other similar words. These
statements discuss future expectations or contain projections of future events.
Actual results may differ materially from those expressed or implied by the
forward-looking statements for various reasons, including general economic
conditions, reliance on suppliers, labor relations and other factors, many of
which are beyond the Company's control. Readers are cautioned not to place undue
reliance on such forward-looking statements.

Three months ended December 31, 1998 compared to three months ended December 31,
1997.

      Revenues. Revenues from Transportation Operations were $68.5 million for
the three months ended December 31, 1998 compared to $55.8 million for the three
months ended December 31, 1997, an increase of $12.7 million or 22.8%. This
increase was due primarily to (i) an increase in billings on existing contracts
of $5.8 million; (ii) the award of new contracts which added $3.8 million of
revenues; and (iii) $3.1 million from the operations of five newly acquired
subsidiaries. Revenues from Bus Sales Operations were $16.5 million for the
three months ended December 31, 1998 compared to $12.4 million for the three
months ended December 31, 1997, an increase of $4.1 million or 33.1%.

      Gross Profit. Gross profit from Transportation Operations was $15.0
million for the three months ended December 31, 1998 compared to $8.6 million
for the three months ended December 31, 1997, an increase of $6.4 million or
73.6%. As a percentage of revenues, gross profit increased to 21.9% in the
second quarter of 1998 from 15.5% in the second quarter of 1997. In the second
quarter of 1997, there was a one time bonus which reduced gross profit by $1.7
million or 3.0%. The increase in gross profit (exclusive of the one time bonus)
of $4.7 million was due primarily to (i) increased revenues (ii) an increase in
gross profit percentage of 2.6% due primarily to a reduction in health and
welfare, fuel and vehicle insurance expenses and (iii) gross profit of $1.2
million generated from operations of newly acquired subsidiaries. Gross Profit
for the Bus Sales Operations was $1.6 million for the three months ended
December 31, 1998 and December 31, 1997. As a percentage of revenues, gross
profit decreased to 9.4% for the three months ended December 31, 1998 from 12.7%
for the three months ended December 31, 1997. The reduction in gross profit
percentage was due primarily to an increase in the current quarter of the
proportion of sales made in the New Jersey market which has had historically
lower gross profit margins than the New York market.

      General and administrative expenses. General and administrative expenses
for the Transportation Operations were $4.6 million for the three months ended
December 31, 1998 compared to $6.0 million for the three months ended December
31, 1997, a decrease of $1.4 million or 23.5%. This decrease was primarily due
to a $1.8 million provision for doubtful accounts taken in the second quarter of
1997 partially offset by $0.4 million of general and administrative expenses
incurred by newly acquired subsidiaries. As a percentage of revenues, general
and administrative expenses decreased to 6.7% for the three months ended
December 31, 1998 from 10.8% for the three months ended December 31, 1997.
General and administrative expenses for the Bus Sales Operations were $1.0
million for the three months ended December 31, 1998 and 1997. As a percentage
of revenues, general and administrative expenses decreased to 6.2% for the three
months ended December 31, 1998 from 8.1% for the three months ended December 31,
1997.

      Depreciation and amortization expenses. Depreciation and amortization
expenses for the Transportation Operations were $2.9 million for the three
months ended December 31, 1998 compared to $3.1 million for the three months
ended December 31, 1997, a decrease of $0.1 million. This decrease was due to
the Company reassessing (on January 1, 1998) and extending the useful lives of
certain fixed assets which reduced depreciation by approximately $0.9 million,
which was partially offset by increases in depreciation due to the purchase of
new vehicles. Depreciation and amortization of Bus Sales Operations was $0.2
million for the second quarter of 1998 compared to $0.3 million for the second
quarter of 1997.


                                       9
<PAGE>

      Income (loss) from operations. Income from operations was $7.8 million for
the three months ended December 31, 1998 compared to a loss from operations of
$0.2 million for the three months ended December 31, 1997, an increase of $8.0
million. This increase was due to the net effect of the items discussed above.

      Net interest expense. Net interest expense was $5.3 million for the three
months ended December 31, 1998 compared to $4.9 million for the three months
ended December 31, 1997, an increase of $0.3 million or 7.0%. This increase was
primarily due to increased interest in connection with the Company's revolving
line of credit and equipment financing.

      Income (loss) before nonrecurring item and taxes. Income before
nonrecurring item and taxes was $2.5 for the three months ended December 31,
1998 compared to a loss before nonrecurring item and taxes of $5.0 million for
the three months ended December 31, 1997, and increase of $7.5 million.

      Nonrecurring item. Nonrecurring item was $2.7 million for the three months
ended December 31, 1998. This represented fees and expenses paid by the
shareholders of Atlantic Express Transportation Group, Inc. (the parent of AETC)
for the benefit of the Company. (See Note 4 of Notes to Consolidated Financial
Statements). There were no nonrecurring items for the three months ended
December 31, 1997.

      Net loss. The Company generated a net loss of $0.1 million for the three
months ended December 31, 1998 compared to a net loss of $2.6 million for the
three months ended December 31, 1997, a decrease of $2.5 million due to the net
effect of the items discussed above.

Six months ended December 31, 1998 compared to six months ended December 31,
1997

      Revenues. Revenues from Transportation Operations were $104.1 million for
the six months ended December 31, 1998 compared to $87.3 million for the six
months ended December 31, 1997, an increase of $16.8 million or 19.2%. This
increase was due primarily to (i) the award of new contracts which added $8.3
million of revenues; (ii) an increase in billings on existing contracts of $4.3
million; (iii) $3.1 million in revenues from operations of five newly acquired
subsidiaries and (iv) $1.1 million of additional summer revenues. Revenues from
Bus Sales Operations were $51.9 million for the six months ended December 31,
1998 compared to $40.0 million for the six months ended December 31, 1997, an
increase of $11.9 million or 29.8%.

      Gross Profit. Gross profit from Transportation Operations was $17.3
million for the six months ended December 31, 1998 compared to $13.0 million for
the six months ended December 31, 1997, an increase of $4.4 million or 33.8%. As
a percentage of revenues, gross profit increased to 16.6% for the six months
ended December 31, 1998 from 14.8% for the six months ended December 31, 1997.
In the second quarter of 1997, there was a one time bonus which reduced gross
profit for the six months ended December 31, 1997 by $1.7 million or 1.9%. The
increase in gross profit (exclusive of the one time bonus) of $2.7 million was
due primarily to (i) increased revenues (ii) gross profit generated by
operations from newly acquired subsidiaries partially offset by a decrease in
gross profit due to a net reduction in revenue days (primarily in New York City)
for the six months ended December 31, 1998. Gross profit for the Bus Sales
Operations was $5.6 million for the six months ended December 31, 1998 compared
to $5.2 million for the six months ended December 31, 1997, an increase of $0.4
million or 8.6%. As a percentage of revenues, gross profit decreased to 10.8%
for the six months ended December 31, 1998 from 12.9% for the six months ended
December 31, 1997. This decrease was due primarily to an increase in the current
six months of the proportion of sales in the New Jersey market which has had
historically lower gross margins then the New York market.

      General and administrative expenses. General and administrative expenses
for the Transportation Operations were $8.2 million for the six months ended
December 31, 1998 compared to $9.0 million for the six months ended December
31,1997, a decrease of $0.8 million or 8.8%. This decrease was principally due
to a $1.8 million provision for doubtful accounts taken in the second quarter of
1997 partially offset by increases in professional fees of $0.5 million and $0.4
million of general and administrative expenses incurred by newly acquired
subsidiaries. As a percentage of revenues, general and administrative expenses
decreased to 7.9% for the six months ended December 31, 1998 from 10.3% for 


                                       10
<PAGE>

the six months ended December 31, 1997. General and administrative expenses for
the Bus Sales Operations was $2.0 million for the six months ended December 31,
1998 compared to $1.7 million for the six months ended December 31, 1997, an
increase of $0.2 million or 12.2%. As a percentage of revenues, general and
administrative expenses decreased to 3.8% for the six months ended December 31,
1998 from 4.4% for the six months ended December 31, 1997.

      Depreciation and amortization expenses. Depreciation and amortization
expenses for the Transportation Operations were $5.6 million for the six months
ended December 31, 1998 compared to $6.0 million for the six months ended
December 31, 1997, a decrease of $0.4 million. This decrease was due to the
Company reassessing (on January 1, 1998) and extending the useful life of
certain fixed assets which reduced depreciation by approximately $1.8 million,
which was partially offset by increases in depreciation due to the purchase of
new vehicles. Depreciation and amortization of Bus Sales Operations were $0.4
million for the six months ended December 31, 1998, compared to $0.7 million for
the six months ended December 31, 1997, a decrease of $0.3 million.

      Income (loss) from operations. Income from operations was $6.8 million for
the six months ended December 31, 1998 compared to $0.6 million for the six
months ended December 31, 1997, an increase of $6.1 million. This increase was
due to the net effect of the items discussed above.

      Net interest expense. Net interest expense was $10.1 million for the six
months ended December 31, 1998 compared to $9.1 million for the six months ended
December 31, 1997, an increase of $1.0 million. This increase was primarily due
to increased interest in connection with the Company's revolving line of credit
and equipment financing.

      Loss before nonrecurring item and taxes. Loss before nonrecurring item and
taxes was $3.4 million for the six months ended December 31, 1998 compared to
$8.2 million for the six months ended December 31, 1997, a decrease of $4.8
million.

      Nonrecurring item. Nonrecurring item was $2.7 million for the six months
ended December 31, 1998. This represented fees and expenses paid by the
shareholders of Atlantic Express Transportation Group, Inc. (the parent of AETC)
for the benefit of the Company. (See Note 4 of Notes to Consolidated Financial
Statements). There were no nonrecurring items for the six months ended December
31, 1997.

      Net loss. The Company generated a net loss of $3.4 million for the six
months ended December 31, 1998 compared to a net loss of $4.5 million for the
six months ended December 31, 1997, a decrease of $1.2 million due to the net
effect of the items discussed above.

Liquidity and Capital Resources

      Management anticipates total capital expenditures of $25.8 million in
fiscal 1999 of which approximately $24.4 million were made by December 31, 1998.
This included approximately $21.3 million for purchase of new vehicles and $3.1
million for other property and equipment.

      Net Cash Used In Operating Activities. Net cash used in operating
activities was $0.8 million for the six months ended December 31, 1998 primarily
due to the following: (i) a net loss of $3.4 million plus non cash items of
depreciation and amortization of $6.6 million and a nonrecurring item of $2.7
million less a $2.7 million increase in deferred tax benefit (ii) use of cash
for working capital of $4.7 million and (iii) an increase of $0.6 million in
other items.

      Net Cash Used in Investing Activities. For the six months ended December
31, 1998, the Company made $24.4 million of capital expenditures to acquire
additional vehicles and equipment. Of these capital expenditures $5.7 million
were directly financed. Effective October 1, 1998, the Company acquired five new
subsidiaries for $6.0 million (net of $1.1 million cash acquired). These
acquisitions were funded from the Company's revolving line of credit.


                                       11
<PAGE>

      Net Cash Provided by Financing Activities. Net cash provided by financing
activities totaled $14.1 million due primarily to $19.4 million net borrowings
under the Company's revolving line of credit, partially offset by principal
payments of $5.0 million on borrowings.

      The Company believes that its Revolving Credit Facility of $30.0 million
(of which $9.2 million was undrawn at December 31, 1998) will provide it with
sufficient liquidity to conduct its operations.

      At December 31, 1998, the Company's total debt and stockholder's equity
were $182.5 million and $20.2 million respectively.

      Impact of Year 2000 on the Company's Systems

      The Company has completed its assessment of all of its computerized
systems and has determined what changes, if any, need to be made so that such
systems, which include information and non-information technology systems, will
function properly with respect to dates in the year 2000 and thereafter to
ensure that the Company's financial, information and operational systems are
year 2000 compliant. The Company has developed a program to implement these
changes, which consists of the following phases: (i) developing solutions for
affected technology and systems (ii) modifying or replacing affected technology
and systems, (iii) testing and verifying solutions, (iv) implementing solutions
and (v) developing contingency plans. The Company has completed its year 2000
compliance at 3 of its locations, including its corporate office. The Company
intends to complete its compliance of its remaining locations by the end of the
calendar year.

      Costs incurred to date directly related to the year 2000 issue have not
been material to the Company. Having completed its assessment of the changes
required to become year 2000 compliant, the Company expects that the total cost
of meeting the goals of its year 2000 program will not be material and will be
expensed as incurred.

      Management is in the process of assessing the potential impact of any year
2000 non-compliant systems of its vendors or customers and has begun
communicating with those vendors and customers with whom the Company does
significant business. A third-party's failure to become year 2000 compliant or
the Company's inability to become compatible with third parties with which the
Company has a material relationship may have an adverse effect on the Company;
however, the Company does not expect its operations to be materially impacted by
any potential systems problems incurred by such vendors or customers.

      The Company is in the process of developing its contingency plan for its
facilities to provide for the most reasonable likely worst case scenarios
regarding year 2000 compliance. This contingency plan is expected to be
completed in 1999.

New Accounting Pronouncement

      Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires that all components of comprehensive
income (loss) and total comprehensive income (loss) be reported on one of the
following: a statement of income and comprehensive (loss), a statement of
comprehensive income (loss) or a statement of stockholder's equity. The Company
is reporting this information on a separate statement of comprehensive income
(loss). Comprehensive income (loss) is comprised of net income (loss) and all
changes to stockholder's equity, except those due to investments by owners
(changes in paid-in capital) and distributions to owners (dividends). This
statement did not change the current accounting treatment for components of
comprehensive income.


                                       12
<PAGE>

PART II     OTHER INFORMATION

Item 1.     Legal Proceedings

            None.

Item 2.     Changes in Securities and Use of Proceeds

            None.

Item 3.     Defaults Upon Senior Securities

            None.

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

            None.

Item 5.     Other Information

            None.

Item 6.     Exhibits and Reports on Form 8-K

            a)    Exhibits

            See Exhibit Index on Page E-1 for exhibits filed with this report on
            Form 10-Q.

            b)    Reports on Form 8-K

                  The Company filed a Current Report on Form 8-K dated November
                  10, 1998, reporting under Item 1 the consummation of the
                  Recapitalization of AETG.


                                       13
<PAGE>

                                   SIGNATURES

      In accordance with the requirements of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized.

                                           ATLANTIC EXPRESS TRANSPORTATION CORP.

                                           By: /s/ NATHAN SCHLENKER
                                               ---------------------------------
                                               Nathan Schlenker
                                               Chief Financial Officer

February 12, 1999


                                       14
<PAGE>


                                Index to Exhibits

      The following documents are exhibits to this Quarterly Report on Form
10-Q. For convenient reference, each exhibit is listed according to the Exhibit
Table of Regulation S-K. The page number, if any, listed opposite an exhibit
indicates the page number in the sequential numbering system on the manually
signed original of this Quarterly Report on Form 10-Q where such exhibit can be
found.


     Exhibit                                                   Sequential Page
     Number                        Exhibit                          Number
     ------                        -------                          ------

      4.1         Third Supplemental Indenture, dated as of
                  October 29, 1998, by and among Atlantic
                  Express Transportation Corp., the
                  Guarantors named therein and The Bank of
                  New York, as Trustee (incorporated by
                  reference to Exhibit 1.1 to the Company's
                  Current Report on Form 8-K filed November
                  10, 1998).

      27.1        Financial Data Schedule


                            E-1