UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




_______________





Form
10-Q





R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
              OF
      1934For
      the quarterly period ended December 31, 2008OR£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
              OF
      1934For
      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
              13-392-4567(State or other jurisdiction of incorporation or organization)
              (IRS Employer Identification No.)





7 North Street
Staten Island, New York 10302-1205


(Address
of principal executive offices)





(718)
442-7000


(Registrant’s
telephone number, including area code)





_______________





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 R     No
£





Indicate
by check mark whether the registrant is a
large  accelerated  filer, an accelerated  filer,
a  non-accelerated  filer or a smaller reporting company.
(as defined in Rule 12b-2 of the Exchange Act).





Large
accelerated filer £Accelerated
filer £Non-accelerated filer RSmaller
reporting company £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £  No
R





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 R  No
£





The
number of outstanding shares of the registrant’s common stock, par value $0.01
per share, as of February 23, 2009 was 1,052,665





INDEX





Page
                  No.PART
      I: FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                3Consolidated
      Balance Sheets— December 31, 2008 (unaudited) and June 30,
      2008
                3Consolidated
      Statements of Operations (unaudited) — Three and Six Months
      Ended  December 31, 2008 and 2007
                4Consolidated
      Statements of Cash Flows (unaudited) — Six Months Ended December 31, 2008
      and  2007
                5Notes
      to Consolidated Financial Statements (unaudited)
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                11Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                16Item
      4.
                Controls
      and Procedures
                17Item
      4T.
                Controls
      and Procedures
                17PART
      II: OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                18Item
      1A.
                Risk
      Factors
                18Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                18Item
      3.
                Defaults
      upon Senior Securities
                18Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                18Item
      5.
                Other
      Information
                18Item
      6.
                Exhibits
                18


2




PART
I.





FINANCIAL
INFORMATION





Item
I.Financial
Statements


Atlantic
Express Transportation Corp. and Subsidiaries


Consolidated
Balance Sheets





December
      31,
                  
                  
                  June
      30,2008
                  
                  
                  2008Assets
                  
                  (unaudited)Current
      assets:Cash
      and cash equivalents
                  
                  $
                  4,274,646
                  
                  
                  $
                  2,682,752Accounts
      receivable, net of allowance for doubtful accounts of $1,469,877 and
      $1,409,877, respectively
                  
                  
                  47,946,659
                  
                  
                  
                  48,422,466Inventories
                  
                  
                  2,617,754
                  
                  
                  
                  3,508,576Prepaid
      insurance
                  
                  
                  17,842,768
                  
                  
                  
                  23,716,875Prepaid
      expenses and other current assets
                  
                  
                  5,785,078
                  
                  
                  
                  4,286,973Total
      current assets
                  
                  
                  78,466,905
                  
                  
                  
                  82,617,642Property,
      plant and equipment, at cost, less accumulated
depreciation
                  
                  
                  77,662,713
                  
                  
                  
                  83,042,309Other
      assets:Transportation
      contract rights, net
                  
                  
                  1,705,762
                  
                  
                  
                  1,866,496Deferred
      financing costs, net
                  
                  
                  5,148,467
                  
                  
                  
                  5,936,307Deposits
      and other non-current assets
                  
                  
                  6,935,610
                  
                  
                  
                  6,590,993Total
      other assets
                  
                  
                  13,789,839
                  
                  
                  
                  14,393,796$
                  169,919,457
                  
                  
                  $
                  180,053,747Liabilities
      and Shareholders’ DeficitCurrent:Current
      portion of long-term debt
                  
                  $
                  1,003,663
                  
                  
                  $
                  766,232Current
      portion of capital lease obligations
                  
                  
                  1,056,058
                  
                  
                  
                  1,463,690Insurance
      financing payable
                  
                  
                  631,866
                  
                  
                  
                  3,247,089Controlled
      disbursements account—checks issued not funded
                  
                  
                  4,589,051
                  
                  
                  
                  3,303,864Accounts
      payable, accrued expenses and other current liabilities
                  
                  
                  13,315,277
                  
                  
                  
                  11,350,285Accrued
      compensation
                  
                  
                  5,065,040
                  
                  
                  
                  4,553,718Current
      portion of deferred income
                  
                  
                  629,777
                  
                  
                  
                  602,931Current
      portion of insurance reserves
                  
                  
                  300,000
                  
                  
                  
                  314,000Accrued
      interest
                  
                  
                  4,867,058
                  
                  
                  
                  5,123,377Payable
      to creditors under the plan of reorganization
                  
                  
                  108,381
                  
                  
                  
                  137,389Total
      current liabilities
                  
                  
                  31,566,171
                  
                  
                  
                  30,862,575Long-term
      debt, net of current portion
                  
                  
                  201,165,874
                  
                  
                  
                  190,465,857Capital
      lease obligations, net of current portion
                  
                  
                  206,187
                  
                  
                  
                  261,846Insurance
      reserves, net of current portion
                  
                  
                  1,026,646
                  
                  
                  
                  486,394Interest
      rate swap
                  
                  
                  7,326,571
                  
                  
                  
                  5,786,069Deferred
      income, net of current portion and other long-term
    liabilities
                  
                  
                  3,607,999
                  
                  
                  
                  3,566,722Deferred
      state and local income taxes
                  
                  
                  —
                  
                  
                  
                  220,000Total
      liabilities
                  
                  
                  244,899,448
                  
                  
                  
                  231,649,463Commitments
      and contingenciesShareholders’
      deficit:Common
      stock, par value $.01 per share, authorized shares 1,303,200; issued and
      outstanding 1,052,665 and 1,032,293, respectively
                  
                  
                  10,527
                  
                  
                  
                  10,323Additional
      paid-in capital
                  
                  
                  114,939,064
                  
                  
                  
                  114,939,064Accumulated
      deficit
                  
                  
                  (189,929,582
                  )
                  
                  
                  (166,545,103
                  )Total
      shareholders’ deficit
                  
                  
                  (74,979,991
                  )
                  
                  
                  (51,595,716
                  )$
                  169,919,457
                  
                  
                  $
                  180,053,747





See
accompanying notes to consolidated financial statements.


3


Atlantic
Express Transportation Corp. and Subsidiaries


Consolidated
Statements of Operations


(Unaudited)





Three Months Ended
                  
                  
                  Six Months EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenues:School bus
      operations
                  
                  $
                  106,525,185
                  
                  
                  $
                  108,782,196
                  
                  
                  $
                  166,006,313
                  
                  
                  $
                  163,653,130Paratransit and transit
      operations
                  
                  
                  12,548,662
                  
                  
                  
                  10,646,408
                  
                  
                  
                  25,327,825
                  
                  
                  
                  22,773,877Total
      revenues
                  
                  
                  119,073,847
                  
                  
                  
                  119,428,604
                  
                  
                  
                  191,334,138
                  
                  
                  
                  186,427,007Costs
      and expenses:Cost of operations—School bus
      operations
                  
                  
                  96,238,363
                  
                  
                  
                  95,122,201
                  
                  
                  
                  159,159,401
                  
                  
                  
                  153,995,918Cost of operations—Paratransit
      and transit operations
                  
                  
                  11,793,694
                  
                  
                  
                  10,006,345
                  
                  
                  
                  23,776,243
                  
                  
                  
                  20,607,555General and
      administrative
                  
                  
                  4,553,061
                  
                  
                  
                  4,575,464
                  
                  
                  
                  8,691,335
                  
                  
                  
                  8,604,450Depreciation and
      amortization
                  
                  
                  4,397,385
                  
                  
                  
                  4,701,193
                  
                  
                  
                  8,755,137
                  
                  
                  
                  9,358,864Total
      operating costs and expenses
                  
                  
                  116,982,503
                  
                  
                  
                  114,405,203
                  
                  
                  
                  200,382,116
                  
                  
                  
                  192,566,787Income
      (loss)  from operations
                  
                  
                  2,091,344
                  
                  
                  
                  5,023,401
                  
                  
                  
                  (9,047,978
                  )
                  
                  
                  (6,139,780
                  )Other
      income (expense):Interest
      expense:Interest
                  
                  
                  (6,304,131
                  )
                  
                  
                  (6,449,297
                  )
                  
                  
                  (12,266,009
                  )
                  
                  
                  (12,762,646
                  )Deferred
      financing costs
                  
                  
                  (393,920
                  )
                  
                  
                  (391,237
                  )
                  
                  
                  (787,840
                  )
                  
                  
                  (780,650
                  )Change
      in fair market value of interest rate swap
                  
                  
                  (2,610,778
                  )
                  
                  
                  (2,806,568
                  )
                  
                  
                  (1,540,504
                  )
                  
                  
                  (5,955,566
                  )Reorganization
    costs
                  
                  
                  (904
                  )
                  
                  
                  (22,991
                  )
                  
                  
                  (13,409
                  )
                  
                  
                  (68,882
                  )Other income
                  
                  
                  2,197
                  
                  
                  
                  16,444
                  
                  
                  
                  51,261
                  
                  
                  
                  110,438Loss
      before income taxes
                  
                  
                  (7,216,192
                  )
                  
                  
                  (4,630,248
                  )
                  
                  
                  (23,604,479
                  )
                  
                  
                  (25,597,086
                  )Provision
      for (benefit from) income taxes
                  
                  
                  —
                  
                  
                  
                  27,000
                  
                  
                  
                  (220,000
                  )
                  
                  
                  (48,000
                  )Net
      loss
                  
                  $
                  (7,216,192
                  )
                  
                  $
                  (4,657,248
                  )
                  
                  $
                  (23,384,479
                  )
                  
                  $
                  (25,549,086
                  )




See
accompanying notes to consolidated financial statements.


4


Atlantic
Express Transportation Corp. and Subsidiaries


Consolidated
Statements of Cash Flows


(Unaudited)





Six Months EndedDecember
      31,2008
                        
                        
                        2007Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (23,384,479
                        )
                        
                        $
                        (25,549,086
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                        
                        
                        8,594,403
                        
                        
                        
                        9,101,944Amortization
                        
                        
                        948,573
                        
                        
                        
                        1,037,570Original issue discount
      interest
                        
                        
                        282,204
                        
                        
                        
                        282,204Change in fair market value of
      interest rate swap
                        
                        
                        1,540,504
                        
                        
                        
                        5,955,566Allowance for doubtful accounts
      receivable
                        
                        
                        60,000
                        
                        
                        
                        60,000Loss (gain) on sales of fixed
      assets, net
                        
                        
                        225,992
                        
                        
                        
                        (141,626
                        )Deferred
      state and local income taxes
                        
                        
                        (220,000
                        )
                        
                        
                        (102,000
                        )Decrease
      (increase) in:Accounts
    receivable
                        
                        
                        415,807
                        
                        
                        
                        (3,537,178
                        )Inventories
                        
                        
                        890,822
                        
                        
                        
                        (203,580
                        )Prepaid expenses and other
      current assets
                        
                        
                        4,376,003
                        
                        
                        
                        5,934,632Deposits and other non-current
      assets
                        
                        
                        (344,617
                        )
                        
                        
                        2,312,441Increase
      (decrease) in:Accounts payable, accrued
      expenses, accrued compensation and other current
    liabilities
                        
                        
                        2,246,841
                        
                        
                        
                        1,826,026Controlled disbursement
      account
                        
                        
                        1,285,187
                        
                        
                        
                        1,585,246Insurance financing
      payable
                        
                        
                        (2,615,223
                        )
                        
                        
                        (3,388,053
                        )Payable
      to creditors under plan of reorganization
                        
                        
                        (29,008
                        )
                        
                        
                        —Insurance reserves and other
      long-term liabilities
                        
                        
                        567,529
                        
                        
                        
                        (52,026
                        )Net
      cash used in operating activities
                        
                        
                        (5,159,462
                        )
                        
                        
                        (4,877,920
                        )Cash
      flows from investing activities:Additions
      to property, plant and equipment
                        
                        
                        (2,609,871
                        )
                        
                        
                        (7,442,378
                        )Increase
      in restricted cash and cash equivalents
                        
                        
                        —
                        
                        
                        
                        (16,191
                        )Proceeds
      from sales of fixed assets
                        
                        
                        207,350
                        
                        
                        
                        188,888Net
      cash used in investing activities
                        
                        
                        (2,402,521
                        )
                        
                        
                        (7,269,681
                        )





Continued




5




Atlantic
Express Transportation Corp. and Subsidiaries


Consolidated
Statements of Cash Flows


(Unaudited)





Six Months Ended
                            December 31,2008
                          
                          
                          2007Cash
      flows from financing activities:Proceeds
      from Amended and Restated Credit Facility, net
                          
                          $
                          9,983,499
                          
                          
                          $
                          7,495,778Distribution
      to parent company
                          
                          
                          —
                          
                          
                          
                          (150,000
                          )Proceeds
      from issuance of common stock
                          
                          
                          204
                          
                          
                          
                          —Principal
      payments on borrowings and capital lease obligations
                          
                          
                          (829,826
                          )
                          
                          
                          (823,844
                          )Deferred
      financing costs
                          
                          
                          —
                          
                          
                          
                          (83,210
                          )Net
      cash provided by financing activities
                          
                          
                          9,153,877
                          
                          
                          
                          6,438,724Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          1,591,894
                          
                          
                          
                          (5,708,877
                          )Cash
      and cash equivalents, beginning of year
                          
                          
                          2,682,752
                          
                          
                          
                          6,881,838Cash
      and cash equivalents, end of period
                          
                          $
                          4,274,646
                          
                          
                          $
                          1,172,961Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                          
                          $
                          12,191,794
                          
                          
                          $
                          10,541,923Income
    taxes
                          
                          $
                          —
                          
                          
                          $
                          76,821Supplemental
      disclosures of non-cash investing and financing activity:Trade-in-value
      of vehicles exchanged
                          
                          $
                          980,000
                          
                          
                          $
                          —Acquisition
      cost of vehicles exchanged
                          
                          $
                          609,073
                          
                          
                          $
                          —Loans
      incurred for purchases of property, plant and equipment
                          
                          $
                          1,038,279
                          
                          
                          $
                          206,623





See
accompanying notes to consolidated financial statements.




6




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 Atlantic
Express Transportation Corp.’s (the “Company’s”) financial statements as of and
for the year ended June 30, 2008 as filed on  the Company’s Annual
Report 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.  Operating results for the periods
presented are not necessarily indicative of the results for the full fiscal
year.





The
Company believes that borrowings under the Amended and Restated Credit Facility
together with its existing cash and cash flow from operations will not be
sufficient to fund the Company’s anticipated liquidity requirements for the next
year and the Company  needs to pursue additional funding alternatives,
including the potential sale of certain assets or operations, in order to fund
its liquidity requirements.  The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





2.              Interest
Rate Swap





Effective
as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
reduce our exposure to interest rate fluctuations on our Senior Secured Notes
due 2012 (the “Notes”), which bear interest at LIBOR plus a margin of
7.25%.  The Swap has a notional amount of $185 million with a fixed
rate of 5.21% instead of LIBOR thereby effectively converting the floating rate
notes to a fixed rate obligation of 12.46%.  The Swap will expire on
April 15, 2010.  On the interest payment dates of the Notes, the
difference between LIBOR and 5.21% will be settled in cash. In accordance with
SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, the Swap does not
qualify for "Cash Flow Hedge Accounting" treatment since the documentation of
the accounting treatment was not done contemporaneously with entering into the
agreement.  The change in the fair market value of this interest swap
agreement for the six months ended December 31, 2008 as valued by Wachovia Bank,
National Association (“Wachovia”) of $1,540,504 is reflected as an increase to
interest expense for the six month period.  Our obligation under the
Swap is secured by the collateral securing our amended and restated credit
facility.





3.              Debt





The
following represents the debt outstanding at December 31, 2008 and June 30,
2008:





December 31,
                  
                  
                  June 30,2008
                  
                  
                  2008(unaudited)Senior
      Secured Floating Rate Notes due 2012 with cash interest payable
      October 15th
      and April 15th(a)
                  
                  $
                  185,000,000
                  
                  
                  $
                  185,000,000Less:
      original issue discount associated with the issuance of the Notes, net
      (a)
                  
                  
                  (1,857,837
                  )
                  
                  
                  (2,140,041
                  )Amended
      and Restated Credit Facility (b)
                  
                  
                  15,935,773
                  
                  
                  
                  5,952,274Various
      notes payable, primarily secured by transportation equipment, with
      interest rates ranging from 8% - 10.3%
                  
                  
                  3,091,601
                  
                  
                  
                  2,419,856202,169,537
                  
                  
                  
                  191,232,089Less
      current portion
                  
                  
                  1,003,663
                  
                  
                  
                  766,232Long-term
      debt, net of current portion
                  
                  $
                  201,165,874
                  
                  
                  $
                  190,465,857





(a)
            On
      May 15, 2007 the Company issued the Notes with an original issue discount
      of $2,775,000, which is being amortized over the term of the
      Notes.  The net proceeds of the Notes were used to repay
      existing indebtedness and for certain other corporate
      purposes.





Annual
interest on the Notes is equal to the applicable LIBOR rate plus a margin of
7.25%.  The applicable LIBOR rate is determined by using the second
London banking day prior to the first day of such interest accrual
period.  The applicable LIBOR rate for the April 15, 2009 payment is
4.38%.  Interest payments are required semiannually through their
maturity date on April 15, 2012 and commenced on October 15,
2007.  Effective as of May 15, 2007, we entered into the Swap to
reduce our exposure to interest rate fluctuations on the Notes (see Note
2).


7





In
connection with the issuance of the Notes, the Company incurred $6.8 million of
transaction costs that are being amortized on a straight-line basis over the
term of the financing.





The
indenture governing the Notes provides for optional redemption and contains
covenants typical of such arrangements including limitations on incurrence of
additional indebtedness.




The Notes
are unconditionally guaranteed on a senior secured basis by each of the
Company’s existing and future domestic subsidiaries that are not unrestricted
domestic subsidiaries, other than certain immaterial subsidiaries. The Notes and
the guarantees rank senior in right of payment to all of the Company’s
subordinated indebtedness and equal in right of payment with all of the
Company’s other senior indebtedness.




The Notes
and the guarantees are secured by a first priority lien on all but one of the
Company’s and the Company’s guarantor subsidiaries’ owned real properties and
hereafter acquired real properties and on substantially all of the Company’s and
the Company’s guarantor subsidiaries’ owned motor vehicles, other than those
constituting excluded assets, and by a second priority lien on those of the
Company’s assets and the assets of the Company’s guarantor subsidiaries which
secure the Company’s and their obligations under the Company’s amended revolving
credit facility (the “Amended and Restated Credit Facility”) on a first priority
basis.




On July
13, 2007 an SEC registered exchange offer was completed with respect to the
Notes.





(b)
            Concurrently
      with the issuance of the Notes, the Company and substantially all of its
      subsidiaries also amended and restated its existing senior credit facility
      with Wachovia to provide up to $35.0 million of borrowing availability
      under a revolving credit facility, subject to customary borrowing
      conditions, plus a $10.0 million letter of credit facility. The Amended
      and Restated Credit Facility is secured by a first priority lien on
      substantially all of the Company’s and its subsidiaries’ assets, other
      than collateral securing the Notes on a first priority basis, and by a
      second priority lien on the real property securing the Notes on a first
      priority basis. In addition, the term of the credit facility was extended
      to December 31, 2011. The Amended and Restated Credit Facility contains
      certain financial covenants, including a minimum last 12 month (“LTM”)
      EBITDA covenant of $26.0 million, which will only be tested if excess
      availability falls below certain levels.  The Company’s LTM
      EBITDA was $14.8 million as of December 31, 2008, however the Company has
      maintained an availability over the required threshold and therefore was
      not subject to the test for any periods through February 23,
      2009.  The Amended and Restated Credit Facility also contains
      customary events of default.





The
borrowing capacity under the Amended and Restated Credit Facility is based upon
85% of the net amount of eligible accounts receivable less
reserves.  Loans under the facility bear interest at the prime rate
which was 3.25% at December 31, 2008.  Letters of credit are subject
to a fee of 1% per annum payable monthly in arrears and any amounts paid by
lenders for letters of credit will bear the same rate as loans under our
revolving facility.  The Company paid a closing fee of $400,000 which
is being amortized over the term of the financing and is required to pay a
servicing fee of $10,000 per month, plus a monthly fee of 0.5% on any unused
portion of its Amended and Restated Credit Facility.





At
December 31, 2008, the Company’s debt under its $35.0 million Amended and
Restated Credit Facility was approximately $15.9 million, and it had $3.6
million of borrowing availability after $6.3 million of reserves, based on the
Company’s borrowing base calculations.





The
Company’s obligation under the Swap is secured by the collateral securing our
Amended and Restated Credit Facility and in connection therewith total reserves
of approximately $7.7 million and $7.3 million for January and February 2009,
respectively, were established against the Company’s borrowing
base.  In February 2008, the Company’s Amended and Restated Credit
Facility was amended to change the calculation of the borrowing base for the
purpose of the calculation of excess availability, solely in relation to testing
the EBITDA covenant, to exclude the first $5.0 million of reserves established
in connection with our Swap.  This change was effective until February
15, 2009. On February 17, 2009 the effective date was extended until April 1,
2009 (see Note 8).  Until August 28, 2008, excess availability was
required to be at least $5.0 million at all times during the period from July 1
to August 31 of any year, and $8.0 million for the balance of the fiscal
year.  As of August 28, 2008, the Amended and Restated Credit Facility
was amended to extend the period where excess availability required is $5.0
million from August 31 of any year to September 15 of any year.  As of
September 25, 2008, the Amended and Restated Credit Facility was further amended
such that the excess availability requirement is as follows: (i) $5.0 million at
all times during the period from July 1, 2008 to September 15, 2008, (ii) $8.0
million at all times during the period from September 16, 2008 to September
30, 2008, (iii) $4.5 million at all times during the period from October 1,
2008 to July 31, 2009, (iv) $4.0 million at all times during the period from
August 1, 2009 to September 15, 2009, (v) $4.5 million at all times during the
period from September 16, 2009 to November 1, 2009, (vi) $8.0 million at
all times during the period from November 2, 2009 to June 30, 2010,
(vii) $5.0 million at all times during the period from July 1 to September
15 of any year (commencing in 2010), and (viii) $8.0 million at all times
during the period from September 16 of any year (commencing in 2010) through
June 30 of the immediately following year.  Based upon these
amendments, the Company did not need to test the EBITDA covenant through
February 23, 2009.  If the reserve in connection with the Swap
increases it may have an adverse effect on the Company’s liquidity, whereby the
Company might have to pursue additional funding alternatives including the
potential sale of certain assets or operations to fund our liquidity
requirements.


8





LTM
      EBITDA was $14.8 million as of December 31, 2008 and we expect LTM EBITDA
      to be below $26.0 million for the next twelve months.  If our
      excess availability for the purpose of testing the EBITDA covenant falls
      below certain levels, this will generate a default under our Amended and
      Restated Credit Facility and under certain circumstances cause a cross
      default under the Notes.  Although the Company believes that it
      would be able to receive a waiver of this default from Wachovia, there can
      be no assurance that this is the case or what the cost to the Company
      might be.  If the Company would not be able to receive a waiver,
      then the amount of the Amended and Restated Credit Facility would be
      reclassified to a short-term
liability.




4.              New
Paratransit Contract





In December 2008, a subsidiary of the
Company was awarded a new paratransit contract by the New York City Transit
Authority (the “TA”) effective June 1, 2009.  The TA estimates the
total amount of this contract to be approximately $517.0 million. This contract
is for a term of ten years with an option for an additional ten
years.  The subsidiary has extended its existing contract, which was
to expire on December 31, 2008 for an additional five months at the existing
terms and conditions that existed on December 31, 2008.





5.              Amended
Employment Contracts





On December 16, 2008, the employment
contracts of Domenic
Gatto, our Chief Executive Officer and President and Nathan Schlenker, our
Chief Financial Officer were amended to conform the employment agreements
to Section 409A of the Internal Revenue Code.  In addition, each of
the agreements was amended to delete those provisions granting Messrs Gatto and
Schlenker annual bonuses in the event the Company achieves results that exceeded
projected EBITDA.





6.              Equity





In July
2008, we issued 20,362 common shares pursuant to the exercise of warrants which
had been issued in connection with our previously outstanding third priority
senior secured notes, and received aggregate proceeds of $204.





7.              Environmental
Issues





By letter
dated August 31, 2007, Fiore Bus Service, Inc., a subsidiary of the Company, was
notified by the US Environmental Protection Agency, or EPA, of a potential
liability in connection with the remediation of the Sutton Brook Disposal Area
Superfund site in Tewksbury, Massachusetts. EPA estimated in Fall 2007 that the
cost to remediate this site is approximately $30 million and is seeking an
agreement from the identified potentially responsible parties, or PRPs,
including Fiore, to undertake the remediation of the site and has also demanded
reimbursement of EPA's expenses and oversight costs, which EPA stated in its
August 2007 letter to be approximately $5.2 million for work performed to date.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, persons who are identified as PRPs such as Fiore may be subject
to strict, joint and several liability for the entire cost of cleaning up
environmental contamination at sites where hazardous substances have been
released. The Company had acquired Fiore in 1998 and the allegations regarding
Fiore relate to events which occurred during the 1980s. The Company has taken
the position that any liability Fiore may have had regarding the remediation of
the Sutton Brook site was discharged in its Chapter 11 bankruptcy
reorganization.  While Fiore intends to pursue this defense vigorously
and believes that its ultimate allocation of costs for this site, if any, should
not be material, we can offer no assurance that the bankruptcy defense will be
upheld in court or that Fiore's share of any liability will not be
material.


8.              Subsequent
Event
  On
February 17, 2009, the Amended and Restated Credit Facility was amended to
provide that at all times prior to April 1, 2009, the calculation of the
borrowing base for the purpose of calculating excess availability, solely in
relation to testing the EBITDA covenant, shall exclude the first $5.0 million of
reserves established in connection with the Swap.  Without the
amendment, such reserves would have been included in the borrowing base
calculation effective as of February 16, 2009.


9.              New
Accounting Standards





In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. This statement was effective for the
Company for the fiscal year beginning July 1, 2008 and had no material
impact on its consolidated financial statements.


9


In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
“Partial Deferral of the Effective Date of Statement 157”.  FSP 157-2
delays the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008.  The Company is currently
evaluating the impact of SFAS 157 on non-financial assets and non-financial
liabilities, but does not expect the adoption to have a material impact on its
consolidated financial statements.




In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active.”  This FSP
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with SFAS 157. 
This FSP clarifies the application of SFAS 157 in determining the fair values of
assets or liabilities in a market that is not active.  This FSP was
effective upon issuance, including prior periods for which financial statements
have not been issued.  The adoption of this FSP did not have a material
impact on our consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS No. 159 gives the
Company  the irrevocable option to carry many financial assets and
liabilities at fair values, with changes in fair value recognized in earnings.
This statement was effective for the Company for the fiscal year beginning
July 1, 2008 and did  not have a material impact on its
consolidated financial statements as the Company did not elect this fair value
option on any financial assets or liabilities.





Effective
July 1, 2008, the Company adopted EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. The adoption of EITF 07-1 did not have a material
impact on the Company’s consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—an amendment of FASB Statement No. 133”.  SFAS
161 requires entities that utilize derivative instruments to provide qualitative
disclosures about their objectives and strategies for using such instruments, as
well as any details of credit-risk-related contingent features contained within
derivatives.  SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied, and the
impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  The Company is currently evaluating the impact of SFAS
161, but does not expect the adoption of SFAS 161 to have a material impact on
its consolidated financial statements.




In June
2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock”.  EITF Issue No. 07-05 clarifies the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which would qualify as a scope exception under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”  EITF Issue No. 07-05
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.  Early adoption for an existing instrument is not
permitted.  The Company is currently evaluating the impact of EITF Issue
No. 07-05, but does not expect the adoption of EITF Issue No. 07-05 to have a
material impact on its consolidated financial statements.





10




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





General





Atlantic Express Transportation Corp.
(“we” or the “Company”) is the third largest provider of school bus
transportation in the United States and the leading provider in New York City,
the largest market in which we operate. We have contracts with approximately 104
school districts in New York, Missouri, Massachusetts, California, Pennsylvania
and New Jersey. For fiscal 2009, we have a contract to provide paratransit
services in New York to physically and mentally challenged passengers who are
unable to use standard public transportation. We also provide other
transportation services, including fixed route transit, express commuter line
and charter and tour buses through our coach services. As of December 31, 2008,
we had a fleet of approximately 5,600 vehicles operating from approximately
50  facilities.





School
bus transportation services accounted for 86.8% and 87.8% of our revenues from
operations for the six months ended December 31, 2008 and 2007, respectively.
Our school bus transportation contracts have provided a relatively predictable
and stable stream of revenues over their terms, which generally initially range
from one to five years. Since 1979, we have achieved substantial contract
renewals, which we believe is due to (1) our reputation for passenger
safety and providing efficient, on-time service, (2) our long-standing
relationships with the school districts we service, (3) the preference of
school districts to maintain continuity of service with their current proven
contractor rather than risk the uncertainty associated with a replacement and
(4) the disadvantage of prospective competitors, who generally would have
to make substantially greater investments than we would in new equipment and who
may experience difficulty obtaining suitable parking and maintenance facilities
in our primary markets, especially in the New York City greater metropolitan
area.





Paratransit and transit services
accounted for 13.2% and 12.2% of our revenues from operations for the six months
ended December 31, 2008 and 2007, respectively. These contracts are awarded by
public transit systems through a public bidding or request for proposal ("RFP")
process. We are generally entitled to a specified charge per hour of vehicle
service together with other fixed charges.  In December 2008, a
subsidiary of the Company was awarded a new paratransit contract by the TA
effective June 1, 2009.  The TA estimates the total amount of this
contract to be approximately $517.0 million. This contract is for a term of ten
years with an option for an additional ten years.  The subsidiary has
extended its existing contract, which was to expire on December 31, 2008 for an
additional five months at the existing terms and conditions that existed on
December 31, 2008.





Results
of Operations





Three Months Ended December 31,
                  
                  
                  Six Months Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007(unaudited)
                  
                  
                  (unaudited)(in
      millions, except percentages)Revenues
                  
                  $
                  119.1
                  
                  
                  
                  100.0
                  %
                  
                  $
                  119.4
                  
                  
                  
                  100.0
                  %
                  
                  $
                  191.3
                  
                  
                  
                  100.0
                  %
                  
                  $
                  186.4
                  
                  
                  
                  100.0
                  %Cost
      of operations
                  
                  
                  108.0
                  
                  
                  
                  90.7
                  %
                  
                  
                  105.1
                  
                  
                  
                  88.0
                  %
                  
                  
                  182.9
                  
                  
                  
                  95.6
                  %
                  
                  
                  174.6
                  
                  
                  
                  93.7
                  %General
      and administrative
                  
                  
                  4.6
                  
                  
                  
                  3.8
                  %
                  
                  
                  4.6
                  
                  
                  
                  3.8
                  %
                  
                  
                  8.7
                  
                  
                  
                  4.5
                  %
                  
                  
                  8.6
                  
                  
                  
                  4.6
                  %Depreciation
      and amortization
                  
                  
                  4.4
                  
                  
                  
                  3.7
                  %
                  
                  
                  4.7
                  
                  
                  
                  3.9
                  %
                  
                  
                  8.8
                  
                  
                  
                  4.6
                  %
                  
                  
                  9.4
                  
                  
                  
                  5.0
                  %Income
      (loss) from operations
                  
                  
                  2.1
                  
                  
                  
                  1.8
                  %
                  
                  
                  5.0
                  
                  
                  
                  4.2
                  %
                  
                  
                  (9.0
                  )
                  
                  
                  (4.7
                  )%
                  
                  
                  (6.1
                  )
                  
                  
                  (3.3
                  )%Interest
      expense
                  
                  
                  9.3
                  
                  
                  
                  7.8
                  %
                  
                  
                  9.6
                  
                  
                  
                  8.1
                  %
                  
                  
                  14.6
                  
                  
                  
                  7.6
                  %
                  
                  
                  19.5
                  
                  
                  
                  10.5
                  %Net
      loss
                  
                  
                  (7.2
                  )
                  
                  
                  (6.1
                  )%
                  
                  
                  (4.7
                  )
                  
                  
                  (3.9
                  )%
                  
                  
                  (23.4
                  )
                  
                  
                  (12.2
                  )%
                  
                  
                  (25.5
                  )
                  
                  
                  (13.7
                  )%





Results
of Operations - Three Months Ended December 31, 2008 Compared to Three Months
Ended December 31, 2007




Revenues.  Revenues
from school bus operations were $106.5 million for the three months ended
December 31, 2008 compared to $108.8 million for the three months ended
December 31, 2007, a decrease of $2.3 million, or 2.1%. This decrease was
due primarily a reduction in service requirements of $2.8 million, due primarily
to two less school days in New York City and $2.9 million in lost
contracts partially offsetby $3.3million of
price increases and $0.1 million in new contracts.





Revenues from paratransit and transit
operations were $12.5 million for the three months ended December 31, 2008
compared to $10.6 million for the three months ended December 31, 2007, an
increase of $1.9 million or 17.9%.  This increase was primarily due to an
increase in service requirements (our paratransit operations were adversely
effected by a ten-day labor strike in December 2007) and by price increases
of$0.3 million.


11


Cost of
Operations.  Cost of operations of school bus operations was
$96.2 million for the three months ended December 31, 2008 compared to $95.1
million for the three months ended December 31, 2007, an increase of
$1.1 million or 1.2%.  This increase was  primarily due
to increases in workers compensation insurance expense of $5.8 million (our
insurance company changed loss development factors for our workers' compensation
and primary automobile liability claims which resulted in significant changes in
the related expenses for policy periods ranging from 2001 through 2007), $0.9
million increase in other fringe benefits and an increase in vehicle lease
expense of $0.6 million.  These increases were partially offset by a
$5.3 million decrease in automobile liability insurance expense and a $1.1
million reduction in fuel expense.  Salaries and wages were $53.8
million for the three months ended December 31, 2008 and 2007.  As a
percentage of revenues, salaries and wages increased to 50.5% for the three
months ended December 31, 2008, from 49.5% for the three months ended December
31, 2007.  As a percentage of revenues, cost of operations increased
to 90.3% for the three months ended December 31, 2008, from 87.4% for the three
months ended December 31, 2007.





Cost of
operations of paratransit and transit operations were $11.8 million for the
three months ended December 31, 2008 compared to $10.0 million for the three
months ended December 31, 2007, an increase of $1.8 million or
17.9%.  This increase was primarily due to an increase in driver wages
of $0.9 million due primarily to increased operations, and $0.9 million increase
in workers' compensation expense.  As a percentage of revenues,
salaries and wages decreased to 51.9% for the three months ended December 31,
2008, from 53.1% for the three months ended December 31, 2007.  As a
percentage of revenues, cost of operations were 94.0% for the three months ended
December 31, 2008 and 2007. We had a labor strike on December 10, 2007
affecting our paratransit operations which lasted for ten days.  On
December 19, 2007 we entered into a new collective bargaining agreement with the
relevant union.





General and administrative
expenses.  General and administrative expenses from school bus
operations were $3.9 million for the three months ended December 31, 2008 and
2007, respectively.  As a percentage of revenues, general and
administrative expenses increased to 3.7% for the three months ended December
31, 2008, from 3.5% for the three months ended and December 31,
2007.





General and administrative expenses
from paratransit and transit operations were $0.7 million for the three months
ended December 31, 2008 and 2007, respectively.  As a percentage of
revenues, general and administrative expenses decreased to 5.2% for the three
months ended December 31, 2008, from 6.7% for the three months ended December
31, 2007.





Depreciation and
amortization.  Depreciation and amortization expense from
school bus operations was $4.1 million for the three months ended December 31,
2008 compared to $4.3 million for the three months ended December 31, 2007,
a decrease of $0.2 million, or 5.3%.  This decrease was primarily
due to the Company having lower depreciation expense for the three months ended
December 31, 2008 as some of the assets are now fully depreciated.





Depreciation
and amortization expense from paratransit and transit operations was
$0.3 million for the three months ended December 31, 2008 compared to $0.4
million for the three months ended December 31, 2007, a decrease of $0.1
million, or 20.9%.  This decrease was primarily due to the Company
having lower depreciation expense for the three months ended December 31, 2008
as some of the assets are now fully depreciated.





Income from operations.Operating income from school bus operations was $2.3 million for the
three months ended December 31, 2008 compared to $5.5 million for the three
months ended December 31, 2007, a decrease in income of $3.2 million, or
58.4%, due to the net effect of the items discussed above.





Operating loss from paratransit and
transit operations was $0.2 million for the three months ended December 31,
2008 compared to $0.4 million loss for the three months ended December 31,
2007, a decrease in loss of $0.3 million, or 58.5% due to the net effect of the
items discussed above.





Interest
expense.  Interest expense was $9.3 million for the three
months ended December 31, 2008 compared to $9.6 million for the three
months ended December 31, 2007, a decrease of $0.3 million, or 3.5%. The
decrease was primarily due to a $0.2 million non-cash change in fair market
value of interest rate swap expense.





Loss before provision for income
taxes.  Due to the net effect of the items discussed above we
experienced a loss of $7.2 million for the three months ended December 31,
2008, compared to a loss of $4.6 million for the three months ended
December 31, 2007, an increase in loss of $2.6 million.





Results
of Operations - Six Months Ended December 31, 2008 Compared to Six Months Ended
December 31, 2007




Revenues.  Revenues
from school bus operations were $166.0 million for the six months ended
December 31, 2008 compared to $163.7 million for the six months ended December
31, 2007, an increase of $2.4 million, or 1.4%.  This increase
was due primarily to$4.3 million of price increases, $1.6 million increase in service
requirements (due primarily to one more school day in New York City and an
increase in summer revenues of $0.7 million) and $0.5 million increase in New
York City Department of Education (“DOE’) escort reimbursement revenue,
partially offset by $4.1 million in lost contracts.


12





Revenues from paratransit and transit
operations were $25.3 million for the six months ended December 31, 2008
compared to $22.8 million for the six months ended December 31, 2007, an
increase of $2.6 million or 11.2%. This increase was primarily due to an
increase in service requirements (our paratransit operations were adversely
effected by a ten-day labor strike in December 2007) and by price increases of$0.6 million.





Cost of
Operations.  Cost of operations of school bus operations was
$159.2 million for the six months ended December 31, 2008 compared to $154.0
million for the six months ended December 31, 2007, an increase of
$5.2 million or 3.4%.  This increase was  primarily due
to increases in workers compensation insurance expense of $6.2 million (our
insurance company changed loss development factors for our workers' compensation
and primary automobile liability claims which resulted in significant changes in
the related expenses for policy periods ranging from 2001 through 2007), $1.3
million increase in other fringe benefits, increase in wages of $1.2 million and
an increase in vehicle lease expense of $1.1 million.  These increases
were partially offset by a $5.9 million decrease in automobile liability
insurance expense.  As a percentage of revenues, salaries and wages
were 51.3% for the six months ended December 31, 2008 and 2007.  As a
percentage of revenues, cost of operations increased to 95.9% for the six months
ended December 31, 2008, from 94.1% for the six months ended December 31,
2007.





Cost of operations of paratransit and
transit operations were $23.8 million for the six months ended December 31,
2008 compared to $20.6 million for the six months ended December 31, 2007, an
increase of $3.2 million or 15.4%.  This increase was primarily
due to an increase in driver wages $1.5 million due primarily to increased
operations, $0.8 million increase in workers’ compensation expense and $0.5
million increase in vehicle lease expense.  As a percentage of
revenues, salaries and wages increased to 51.4% for the six months ended
December 31, 2008, from 51.0% for the six months ended December 31,
2007.  As a percentage of revenues, cost of operations increased to
93.9% for the six months ended December 31, 2008, from 90.5% for the six months
ended December 31, 2007.  We had a labor strike on December
10, 2007 affecting our paratransit operations which lasted for ten
days.  On December 19, 2007 we entered into a new collective
bargaining agreement with the relevant union.





General and administrative
expenses.  General and administrative expenses from school bus
operations were $7.4 million for the six months ended December 31, 2008 compared
to $7.2 million for the six months ended December 31, 2007, an increase of $0.3
million or 3.6%.  This increase was primarily due to increases in
professional fees and advertising expenses.  As a percentage of
revenues, general and administrative expenses were 4.5% for the six months ended
December 31, 2008 compared to 4.4% for the six months ended December 31,
2007.





General and administrative expenses
from paratransit and transit operations was $1.3 million for the six months
ended December 31, 2008 compared to $1.4 million for the six months ended
December 31, 2007, a decrease of $0.2 million or 12.2%.  This decrease
was primarily due to reduced adverting expense.  As a percentage of
revenues, general and administrative expenses decreased to 5.0% for the six
months ended December 31, 2008, from 6.3% for the six months ended December 31,
2007.





Depreciation and
amortization.  Depreciation and amortization expense from
school bus operations was $8.2 million for the six months ended December
31, 2008 compared to $8.7 million for the six months ended December 31,
2007, a decrease of $0.5 million, or 5.3%. This decrease was primarily due
to the Company having lower depreciation expense for the six months ended
December 31, 2008 as some of the assets are now fully depreciated.





Depreciation
and amortization expense from paratransit and transit operations was
$0.6 million for the six months ended December 31, 2008 compared to
$0.7 million for the six months ended December 31, 2007, a decrease of
$0.1 million, or 20.8%.  This decrease was primarily due to the
Company having lower depreciation expense for the six months ended December 31,
2008 as some of the assets are now fully depreciated.





Loss from
operations.  Operating loss from school bus operations was
$8.8 million for the six months ended December 31, 2008 compared to $6.2
million loss for the six months ended December 31, 2007, an increase in loss of
$2.6 million, or 42.4% due to the net effect of the items discussed
above.





Operating loss from paratransit and
transit operations was $0.3 million compared to minimal income for the six
months ended December 31, 2007, a decrease of $0.3 million due to the net effect
of the items discussed above.





Interest
expense.  Interest expense was $14.6 million for the six months
ended December 31, 2008 compared to $19.5 million for the six months ended
December 31, 2007, a decrease of $4.9 million, or 25.1%. The decrease was
primarily due to a $4.4 million non-cash change in fair market value of interest
rate swap expense and $0.3 million decrease in interest expense on the
Notes.





Loss before benefit from income
taxes.  Due to the net effect of the items discussed above we
experienced a loss of $23.6 million for the six months ended December 31,
2008 compared to a loss of $25.6 million for the six months ended December 31,
2007, a decrease in loss of $2.0 million.


13





Liquidity
and Capital Resources





The statements regarding the
Company’s anticipated capital expenditures and service requirements are “forward
looking” statements which involve unknown risks and uncertainties, such as the
Company’s ability to meet or exceed its growth plans and/or available financing,
which may cause actual capital expenditures to differ materially from currently
anticipated amounts.





The
Company operated a fleet of approximately 5,600 vehicles as of December 31, 2008
and consumes substantial quantities of fuel for its operations. Based on the
Company’s current operations, an increase in fuel costs of 10 cents per gallon
will increase its cost of fuel purchased by approximately $0.9 million on an
annual basis.





The
Company anticipates capital expenditures for the fiscal year ending June 30,
2009 of approximately $7.0 million (including approximately $5.0 million of
non-vehicle capital expenditures), of which $3.6 million were made during the
six months ended December 31, 2008.  The Company has met the majority
of its vehicle requirements for the fiscal year ended June 30, 2009 by the use
of operating leases as it did for the fiscal year ended June 30,
2008.  Vehicle lease expense increased $1.6 million for the six months
ended December 31, 2008, from the six months ended December 31,
2007.  The Company anticipates its vehicle lease expense will increase
by approximately $3.3 million for the fiscal year ending June 30,
2009.





On May
15, 2007 the Company issued $185.0 million aggregate principal amount of Senior
Secured Floating Rate Notes due 2012 (the “Notes”).  The Notes were
issued with an original issue discount of $2.8 million, which is being amortized
over the term of the notes.  The net proceeds of the Notes were used
to repay $116.3 million of our previously outstanding
notes, $15.5 million of the third-priority senior secured notes, $4.9
million of the senior unsecured notes, repayment of a $3.5 million letter of
credit advance, $1.6 million of PIK interest converted into debt, $12.1 million
for the buyout of vehicle operating leases and $4.8 million for outstanding
administrative priority claims.  The balance was used for other
corporate purposes.





Effective
as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
reduce our exposure to interest rate fluctuations on the Notes, which bear
interest at LIBOR plus a margin of 7.25%.  The Swap has a notional
amount of $185 million with a fixed rate of 5.21% instead of LIBOR thereby
effectively converting the floating rate notes to a fixed rate obligation of
12.46%.  The Swap will expire in April 15, 2010.  On the
interest payment dates of the Notes, the difference between LIBOR and 5.21% is
required to be settled in cash. In accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Swap does not qualify for "Cash
Flow Hedge Accounting" treatment since the documentation of the accounting
treatment was not done contemporaneously with entering into the
agreement.  The change in the fair market value of this interest swap
agreement for the six months ended December 31, 2008 as valued by Wachovia of
$1,540,504 is reflected as an increase in interest expense for the six month
period.  Our obligation under the Swap is secured by the collateral
securing our amended and restated credit facility (the “Amended and Restated
Credit Facility”).





Our
obligation under the Swap is secured by the collateral securing our Amended and
Restated Credit Facility and in connection therewith total reserves of
approximately $7.7 million and $7.3 million for January 2009 and February 2009,
respectively, were established against our borrowing base.  In
February 2008, our Amended and Restated Credit Facility was amended to change
the calculation of the  borrowing base for the purpose of the
calculation of excess availability, solely in relation to testing the EBITDA
covenant (see Note 3 (b) to Notes to Consolidated Financial Statements included
elsewhere in this Form 10-Q) to exclude the first $5.0 million of reserves
established in connection with our Swap.  This change was effective
from January 1, 2008 until February 15, 2009.  On February 17, 2009
the effective date was extended until April 1, 2009 (see Note 8 to Notes to
Consolidated Financial Statements included elsewhere in this Form 10-Q for
further discussion).  Until August 28, 2008, excess
availability was required to be at least $5.0 million at all times during the
period from July 1 to August 31 of any year, and $8.0 million for the balance of
the fiscal year.  As of August 28, 2008, the Amended and Restated
Credit Facility was amended to extend the period where excess availability
required is $5.0 million from August 31 of any year to September 15 of any
year.  As of September 25, 2008, the Amended and Restated Credit
Facility was further amended such that the excess availability requirement is as
follows: (i) $5.0 million at all times during the period from July 1, 2008 to
September 15, 2008, (ii) $8.0 million at all times during the period from
September 16, 2008 to September 30, 2008, (iii) $4.5 million at all
times during the period from October 1, 2008 to July 31, 2009, (iv) $4.0 million
at all times during the period from August 1, 2009 to September 15, 2009, (v)
$4.5 million at all times during the period from September 16, 2009 to November
1, 2009, (vi) $8.0 million at all times during the period from
November 2, 2009 to June 30, 2010, (vii) $5.0 million at all times
during the period from July 1 to September 15 of any year (commencing in 2010),
and (viii) $8.0 million at all times during the period from September 16 of
any year (commencing in 2010) through June 30 of the immediately following
year.  Based upon these amendments, the Company did not need to test
the EBITDA covenant through February 23, 2009.


Concurrently
with the issuance of the Notes, the Company and substantially all of its
subsidiaries also amended and restated its existing senior credit facility with
Wachovia as agent, to provide up to $35.0 million of borrowing availability
under a revolving credit facility, subject to customary borrowing conditions,
plus a $10.0 million letters of credit facility. The Amended and Restated Credit
Facility is secured by a first priority lien on substantially all of the
Company’s and its subsidiaries’ assets, other than collateral securing the Notes
on a first priority basis. In addition, the term of the credit facility was
extended from February 29, 2008 to December 31, 2011. The Amended and Restated
Credit Facility contains customary events of default and contains a minimum last
12 month (“LTM”) EBITDA covenant of $26.0 million, which will only be tested if
excess availability falls below certain levels. The LTM EBITDA was $14.8 million
as of December 31, 2008, but was not tested because the Company met the
availability requirements.


14





The
borrowing capacity under the Amended and Restated Credit Facility is based upon
85% of the net amount of eligible accounts receivable less
reserves.  Our senior lender has established borrowing base reserves
of approximately $7.7 million and $7.3 million for January 2009 and February
2009, respectively, in connection with our Swap (see Notes 2 and 3(b) to Notes
to Consolidated Financial Statements included elsewhere in this Form
10-Q).  Loans under the facility bear interest at the prime rate (the
prime rate at December 31, 2008 was 3.25%).  Letters of credit are
subject to a fee of 1% per annum payable monthly in arrears and any amounts paid
by  lenders for letters of credit will bear the same rate as loans
under our revolving facility.  The Company paid a closing fee of
$400,000 and is required to pay a servicing fee of $10,000 per month, plus pay a
monthly fee of 0.5% on any unused portion of its Amended and Restated Credit
Facility.





Under the
terms of our contract with the DOE (our largest customer) the Company has
received a CPI increase of 4% for the fiscal year ending June 30,
2009.  However, because of a reduction in the number of routes and a
change in the configuration of routes for the year the increase was effectively
reduced  to 3.1% at December 31, 2008.





The
Company, in addition to normal working capital requirements, has significant
interest obligations and capital expenditure requirements to finance its
operations.  Our senior lender has established borrowing
base  reserves of approximately $7.7 million and $7.3 million for
January 2009 and February 2009, respectively, in connection with our Swap (see
Notes 2 and 3(b) to Notes to Consolidated Financial Statements included
elsewhere in this Form 10-Q). If these reserves increase they may have a
significant adverse effect on the Company’s liquidity.





For the
fiscal year ending June 30, 2009 there will be two less DOE revenue days as well
as one additional payroll day compared to the fiscal year ended June 30, 2008.
This will have a negative impact on the Company’s margins. In addition, the
company has been informed by its insurance company that it will not receive any
retrospective insurance credits (as previously expected) this
year.  The Company believes that borrowings under the Amended and
Restated Credit Facility together with its existing cash and cash flow from
operations will not be sufficient to fund the Company’s anticipated liquidity
requirements for the next year and the Company  needs to pursue
additional funding alternatives, including the potential sale of certain assets
or operations, in order to fund its liquidity requirements.





LTM
EBITDA was $14.8 million as of December 31, 2008 and we expect LTM EBITDA to be
below $26.0 million for the next twelve months.  If our excess
availability for the purpose of testing the EBITDA covenant (see Note 3(b) to
Notes to Consolidated Financial Statements included elsewhere in this Form 10-Q)
falls below certain levels, this will generate a default under our Amended and
Restated Credit Facility and under certain circumstances cause a cross default
under the Notes.  Although the Company believes that it would be able
to receive a waiver of this default from Wachovia, there can be no assurance
that this is the case or what the cost to the Company might be.  If
the Company would not be able to receive a waiver, then the amount of the
Amended and Restated Credit Facility would be reclassified to a current
liability.





As of December 31, 2008, total current
assets were $78.5 million and total current liabilities were $31.6
million.  At December 31, 2008, the Company’s debt under its $35.0
million Amended and Restated Credit Facility was $15.9 million, and it had $3.6
million of borrowing availability, based on the Company’s borrowing base
calculations. Approximately $8.9 million of the Company’s $10.0 million letter
of credit facility was used.  On February 10, 2009, under our Amended
and Restated Credit Facility the Company had a credit balance of $2.8 million,
and it had $15.2 million in borrowing availability, based upon the Company’s
borrowing base calculations.





Net cash used in operating
activities.Net cash used in operating activities was $5.2 million for
the six months ended December 31, 2008, resulting primarily from $23.1 million
used in operating activities, partially offset by cash provided by changes in
the components of working capital of $6.6 million and by non-cash items of $11.3
million ($9.5 million of depreciation and amortization, $1.5 million of interest
swap expense and $0.3 million of amortization of original issue
discount).





Net cash used in
operating activities was $4.9 million for the six months ended December 31,
2007, resulting primarily from $23.5 million used in operating activities
partially offset by cash provided by changes in the components of working
capital of $2.2 million, and by non-cash items of $16.4 million ($10.1 million
of depreciation and amortization, $6.0 million of interest swap expense and $0.3
million of amortization of original issue discount).





Net cash used in investing
activities.For the six months ended December 31, 2008, the net cash used
in investing activities was $2.4 million resulting primarily from $3.6 million
of capital expenditures of which $1.0 million were financed by purchase money
mortgages and $2.6 million were financed from operating cash flows, partially
offset by $0.2 million proceeds from sales of fixed assets.


15


For the
six months ended December 31, 2007, the net cash used in investing activities
was $7.3 million resulting primarily from $7.6 million of capital expenditures
of which $0.2 million were financed by purchase money mortgages and $7.4 million
were financed from operating cash flows, partially offset by $0.2 million
proceeds from sales of fixed assets.





Net cash provided by financing
activities.Net cash provided by financing activities totaled $9.2
million for the six months ended December 31, 2008 due primarily to $10.0
million of net borrowings under the Amended and Restated Credit Facility
partially offset by $0.8 million of principal payments on borrowings and capital
lease obligations.





Net cash
provided by financing activities totaled $6.4 million for the six months ended
December 31, 2007 due primarily to $7.5 million of net borrowings under the
Amended and Restated Credit Facility, partially offset by $0.8 million in
payments on borrowings under capital leases and purchase money
mortgages.




Commitments and
Contingencies




Reference
is made to Note 12  “Commitments and Contingencies” of Notes to
Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2008 for a description of the Company’s
material commitments and contingencies.





Critical
Accounting Policies





In presenting our consolidated
financial statements in conformity with U.S. generally accepted accounting
principles, we are required to make estimates and judgments that affect the
amounts reported therein. Some of the estimates and assumptions we are required
to make relate to matters that are inherently uncertain as they pertain to
future events. We base these estimates on historical experience and on various
other assumptions that we believe to be reasonable and appropriate. Actual
results may differ significantly from these estimates. A discussion of our
critical accounting policies and the related judgments and estimates affecting
the preparation of our consolidated financial statements is included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2008.  There have been no material changes to our critical accounting
policies as of December 31 , 2008.





Disclosure
Regarding Forward-Looking Statements





This report contains forward-looking
statements. These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”
“continue” or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.





Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. These forward-looking statements are made as of the date of this
report and, except as required under the federal securities laws and the rules
and regulations of the SEC, we assume no obligation to update or revise them or
to provide reasons why actual results may differ.





Item
3.Quantitative and
Qualitative Disclosures About Market Risk





In the normal course of operations, we
are exposed to market risks arising from adverse changes in interest rates.
Market risk is defined for these purposes as the potential change in the fair
value of financial assets or liabilities resulting from an adverse movement in
interest rates.





We operated a fleet of approximately
5,600 vehicles as of December 31, 2008 and consume substantial quantities of
fuel for our operations. Based on our current operations, an increase in fuel
costs of ten cents per gallon will increase our cost of fuel purchased by
approximately $0.9 million on an annual basis. From time to time in the
past, we have entered into hedging contracts to protect ourselves from
fluctuations in the cost of fuel. We currently have  hedged
approximately 25% of our expected fuel requirements in New York City through
June 30, 2009 and we continually evaluate entering into additional such
agreements if we believe increases in fuel costs are likely. No assurance can be
given that we will be able to adequately protect ourselves from fluctuating fuel
costs even if we enter into hedging contracts.


16





As ofDecember
31, 2008, our only
variable rate borrowings are the notes (LIBOR plus 7.25% interest) and the
Amended and Restated Credit Facility (prime rate).  OnMay 15,
2007 we reduced our exposure to interest rate fluctuations on our notesby entering intothe Swap. The Swap has a notional amount of $185 million with a fixed
rate of 5.21% instead of LIBOR thereby effectively converting the floating rate
notes to a fixed rate obligation of 12.46%.  The Swap will expire on
April 15, 2010.  On the interest payment dates of the notes, the
difference between LIBOR and 5.21% will be settled in cash.  As
of  December 31, 2008 the fair market value of the Swap as valued by
Wachovia was a $7.3 million liability.  Our obligation under the Swap
is secured by the collateral securing our Amended and Restated Credit
Facility.  As ofDecember
31, 2008, based upon
our variable interest rate borrowings, a 100 basis point increase in interest
rates, applied to our maximum variable rate borrowings, would have no material
effect on interest expense or corresponding cash flows until periods commencing
April 16, 2010.





Item
4.Controls and
Procedures





Not
applicable





Item
4T. Controls and
Procedures





The
Company maintains disclosure controls and procedures (as defined in Rule
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), that are designed to ensure that information required to be disclosed by
the Company in reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to the Company’s management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.





As of the
end of the period covered by this Form 10-Q, we carried out an evaluation under
the supervision and with the participation of our management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e).  Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
our reports filed under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and that
such information is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.  Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of our disclosure controls and procedures were effective as
of December 31, 2008.





There
were no changes in our internal controls over financial reporting, identified in
connection with the evaluation of such internal control that occurred during our
last fiscal quarter, that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.





17





PART
II.





OTHER
INFORMATION





Item
1.Legal
Proceedings





By letter
dated August 31, 2007, Fiore Bus Service, Inc., a subsidiary of the Company, was
notified by the US Environmental Protection Agency, or EPA, of a potential
liability in connection with the remediation of the Sutton Brook Disposal Area
Superfund site in Tewksbury, Massachusetts. EPA estimated in Fall 2007 that the
cost to remediate this site is approximately $30 million and is seeking an
agreement from the identified potentially responsible parties, or PRPs,
including Fiore, to undertake the remediation of the site and has also demanded
reimbursement of EPA's expenses and oversight costs, which EPA stated in its
August 2007 letter to be approximately $5.2 million for work performed to date.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, persons who are identified as PRPs such as Fiore may be subject
to strict, joint and several liability for the entire cost of cleaning up
environmental contamination at sites where hazardous substances have been
released. The Company had acquired Fiore in 1998 and the allegations regarding
Fiore relate to events which occurred during the 1980s. The Company has taken
the position that any liability Fiore may have had regarding the remediation of
the Sutton Brook site was discharged in its Chapter 11 bankruptcy
reorganization.  While Fiore intends to pursue this defense vigorously
and believes that its ultimate allocation of costs for this site, if any, should
not be material, we can offer no assurance that the bankruptcy defense will be
upheld in court or that Fiore's share of any liability will not be
material.





Item
1A.Risk
Factors





Our operations and financial results
are subject to various risks and uncertainties that could
adversely  affect  our  business, financial
condition, results of operations, and trading price of the
Notes.  Please refer to the Company’s Annual Report on Form 10-K for
fiscal year 2008 for additional information concerning these risk factors and
other uncertainties that could negatively impact the Company.





The Company believes that borrowings
under the Amended and Restated Credit Facility together with its existing cash
and cash flow from operations will not be sufficient to fund the Company’s
anticipated liquidity requirements for the next year and the
Company  needs to pursue additional funding alternatives, including
the potential sale of certain assets or operations, in order to fund its
liquidity requirements.





Item
2.Unregistered
Sales of Equity 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


The
following documents are filed as Exhibits to this report:





Exhibit No.
                  
                  Description10.1
                  
                  New
      York City Transit Contract #07H9751C, by and between New York City Transit
      Authority and Atlantic Paratrans of NYC, Inc.10.2
                  
                  New
      York City Transit Authority Contract Modification / Change Order dated
      December 19, 200810.3
                  
                  Amendment
      No. 4 to Third Amended and Restated Loan and Security Agreement, dated
      February 17, 200931.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer32.1
                  
                  Section
      1350 Certification of Principal Executive Officer32.2
                  
                  Section
      1350 Certification of Principal Financial
  Officer


18





SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, Atlantic
Express Transportation Corp. has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





ATLANTIC
      EXPRESS TRANSPORTATION CORP.Date:  February
      23, 2009
                    By:
                    /s/
      Domenic GattoDomenic
      GattoChief
      Executive Officer(Principal
      Executive Officer)Date:  February
      23, 2009
                    By:
                    /s/
      Nathan SchlenkerNathan
      SchlenkerChief
      Financial Officer(Principal
      Financial and Principal Accounting
Officer)


19





EXHIBIT
INDEX





Exhibit No.
                
                Description10.1
                
                New
      York City Transit Contract #07H9751C, by and between New York City Transit
      Authority and Atlantic Paratrans of NYC, Inc.10.2
                
                New
      York City Transit Authority Contract Modification / Change Order dated
      December 19, 200810.3
                
                Amendment
      No. 4 to Third Amended and Restated Loan and Security Agreement, dated
      February 17, 200931.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer32.1
                
                Section
      1350 Certification of Principal Executive Officer32.2
                
                Section
      1350 Certification of Principal Financial
  Officer


20