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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K/A

(Amendment No. 2)



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended June 30, 2003



Commission file number 0-22056



Rural/Metro Corporation

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 86-0746929                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



8401 East Indian
School Road, Scottsdale, Arizona 85251

(Address of principal executive offices) (Zip Code)



Registrants telephone number, including area code: (480) 606-3886



Securities registered pursuant to Section 12(b) of the
Act: None



Securities registered pursuant to Section
12(g) of the Act:



Common Stock, par value $.01 per share

Preferred Stock Purchase Rights

(Title of Class)



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



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. x



Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ̈No x



As of December 31,
2002, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sales price of such stock as of such date on the Nasdaq SmallCap Market, was $33,247,400. Shares of Common
Stock held by each officer and director and by each person who owned 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily
conclusive.



As of February 6, 2004, there were 16,739,330
shares of the registrants Common Stock outstanding.



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1



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Rural/Metro Corporation hereby amends Items 6-8 of Part II to its Annual Report on Form 10-K for the year
ended June 30, 2003. In addition to amending Items 6-8 in regard to the earnings per share calculation matter described below under the heading Restatement of Consolidated Financial Statements, this Report on Form 10-K/A (this
amendment) also amends Items 9 and 9A. This amendment does not provide updating information with respect to Items 6-8 except as to the earnings per share calculation matter described below. We provide regular updating information through
our normal periodic reporting process under the Securities Exchange Act of 1934, as amended.



Restatement of Consolidated Financial Statements



We identified certain accounting matters relating to our consolidated financial statements for years prior to 2003 that required restatement. The matters subject to the restatement, which are summarized below and
discussed in Note 2 to the consolidated financial statements, increased our accumulated deficit by $59.3 million at June 30, 2000 after consideration of the related income tax effects. The restatement adjustments were necessary to (i) adjust the
provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in prior years and to reduce our accounts receivable balance through March 31, 2003, and (ii) to defer enrollment fees
charged to new subscribers under our fire protection service contracts and to recognize such fees over the estimated customer relationship period.



During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical
Services Enterprise, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be
consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial
statements of prior periods have been restated for comparative purposes as allowed by FIN 46.



In addition to the above, effective September 27, 2002 we sold our Latin American operations to local management. The results of our Latin American operations have been included in discontinued operations for the
periods presented.



As described in Note 2 to our consolidated
financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B
redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date (subject to approval by our shareholders of an increase in
the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class
method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.



2



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|ITEM 6. | Selected Financial Data
|------- | -----------------------



The following selected financial data for fiscal years 2003, 2002 and 2001 has been derived from our audited consolidated financial statements and should
be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes appearing elsewhere in this Report. The selected financial data
set forth for fiscal years 1999 and 2000 has been derived from our unaudited consolidated financial statements.



3



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|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                                   |  | Years Ended June 30,                  |        
|                                                                                                                                                   |  | 2003                                  |         |   | 2002 |   |         | 2001 |  |   | 2000     |   |  | 1999 |        
|                                                                                                                                                   |  | As Restated (1)                       |        
|                                                                                                                                                   |  | (in thousands, except per share data) |        
|Statement of Operations Data                                                                                                                       |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net revenue                                                                                                                                        |  | $                                     | 520,477 |   |      | $ | 488,980 |      |  | $ | 479,414  |   |  | $    | 509,057 |   |  | $ | 497,705 |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Operating expenses                                                                                                                                 |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Payroll and employee benefits                                                                                                                      |  |                                       | 284,021 |   |      |   | 269,123 |      |  |   | 271,976  |   |  |      | 293,161 |   |  |   | 264,409 |  
|Provision for doubtful accounts                                                                                                                    |  |                                       | 85,046  |   |      |   | 77,725  |      |  |   | 86,876   |   |  |      | 103,311 |   |  |   | 101,482 |  
|Depreciation and amortization                                                                                                                      |  |                                       | 13,289  |   |      |   | 16,267  |      |  |   | 25,741   |   |  |      | 30,299  |   |  |   | 30,971  |  
|Other operating expenses                                                                                                                           |  |                                       | 113,535 |   |      |   | 103,280 |      |  |   | 131,889  |   |  |      | 118,173 |   |  |   | 92,592  |  
|Asset impairment charges(2)                                                                                                                        |  |                                       |        |   |      |   |        |      |  |   | 48,050   |   |  |      |        |   |  |   |        |  
|Contract termination costs and related asset impairment(2)                                                                                         |  |                                       |        |   |      |   | (107    | )    |  |   | 9,256    |   |  |      |        |   |  |   |        |  
|Restructuring charge and other(2)                                                                                                                  |  |                                       | (1,421  | ) |      |   | (718    | )    |  |   | 9,091    |   |  |      | 32,864  |   |  |   | 2,500   |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Operating income (loss)                                                                                                                            |  |                                       | 26,007  |   |      |   | 23,410  |      |  |   | (103,465 | ) |  |      | (68,751 | ) |  |   | 5,751   |  
|Interest expense                                                                                                                                   |  |                                       | (28,012 | ) |      |   | (25,462 | )    |  |   | (30,624  | ) |  |      | (25,938 | ) |  |   | (21,054 | )
|Interest income                                                                                                                                    |  |                                       | 197     |   |      |   | 644     |      |  |   | 642      |   |  |      | 596     |   |  |   | 92      |  
|Other income (expense), net                                                                                                                        |  |                                       | 146     |   |      |   | 8       |      |  |   | (4,053   | ) |  |      |        |   |  |   |        |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Loss from continuing operations before income taxes, minority interest, extraordinary loss and cumulative effect of change in accounting
principle |  |                                       | (1,662  | ) |      |   | (1,400  | )    |  |   | (137,500 | ) |  |      | (94,093 | ) |  |   | (15,211 | )
|Income tax (provision) benefit                                                                                                                     |  |                                       | (197    | ) |      |   | 2,520   |      |  |   | (1,137   | ) |  |      | 33,756  |   |  |   | (8,225  | )
|Minority interest                                                                                                                                  |  |                                       | (1,507  | ) |      |   | (750    | )    |  |   | 705      |   |  |      | 1,907   |   |  |   | (2,298  | )
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Income (loss) from continuing operations before extraordinary loss and cumulative effect of change in accounting principle                         |  |                                       | (3,366  | ) |      |   | 370     |      |  |   | (137,932 | ) |  |      | (58,430 | ) |  |   | (25,734 | )
|Income (loss) from discontinued operations(2)(3)                                                                                                   |  |                                       | 12,332  |   |      |   | 979     |      |  |   | (67,358  | ) |  |      | (2,066  | ) |  |   | 4,143   |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Income (loss) before extraordinary loss and cumulative effect of change in accounting principle                                                    |  |                                       | 8,966   |   |      |   | 1,349   |      |  |   | (205,290 | ) |  |      | (60,496 | ) |  |   | (21,591 | )
|Extraordinary loss on expropriation of Canadian ambulance service licenses(4)                                                                      |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      | (1,200  | ) |  |   |        |  
|Cumulative effect of change in accounting principle(5)                                                                                             |  |                                       |        |   |      |   | (49,513 | )    |  |   |         |   |  |      | (541    | ) |  |   |        |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net income (loss)                                                                                                                                  |  |                                       | 8,966   |   |      |   | (48,164 | )    |  |   | (205,290 | ) |  |      | (62,237 | ) |  |   | (21,591 | )
|Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method(6)                                |  |                                       | (804    | ) |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Less: Accretion of redeemable nonconvertible participating preferred stock                                                                         |  |                                       | (3,604  | ) |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net income (loss) applicable to common stock                                                                                                       |  | $                                     | 4,558   |   |      | $ | (48,164 | )    |  | $ | (205,290 | ) |  | $    | (62,237 | ) |  | $ | (21,591 | )
|                                                                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  



4



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|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                      |  | Years Ended June 30,                  |       
|                                                                                                                                                      |  | 2003                                  |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|                                                                                                                                                      |  | As Restated (1)                       |       
|                                                                                                                                                      |  | (in thousands, except per share data) |       
|Basic earnings per share:                                                                                                                             |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting
principle |  | $                                     | (0.42  | ) |      | $ | 0.02   |      |  | $ | (9.35  | ) |  | $    | (4.00  | ) |  | $ | (1.78  | )
|Income (loss) from discontinued operations applicable to common stock(3)                                                                              |  |                                       | 0.70   |   |      |   | 0.07   |      |  |   | (4.57  | ) |  |      | (0.15  | ) |  |   | 0.29   |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) before extraordinary loss and cumulative effect of change in accounting principle                                                       |  |                                       | 0.28   |   |      |   | 0.09   |      |  |   | (13.92 | ) |  |      | (4.15  | ) |  |   | (1.49  | )
|Extraordinary loss on expropriation of Canadian ambulance service licenses(4)                                                                         |  |                                       |       |   |      |   |       |      |  |   |       |   |  |      | (0.08  | ) |  |   |       |  
|Cumulative effect of change in accounting principle(5)                                                                                                |  |                                       |       |   |      |   | (3.26  | )    |  |   |       |   |  |      | (0.04  | ) |  |   |       |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss)                                                                                                                                     |  | $                                     | 0.28   |   |      | $ | (3.17  | )    |  | $ | (13.92 | ) |  | $    | (4.27  | ) |  | $ | (1.49  | )
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted earnings per share:                                                                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting
principle |  | $                                     | (0.42  | ) |      | $ | 0.02   |      |  | $ | (9.35  | ) |  | $    | (4.00  | ) |  | $ | (1.78  | )
|Income (loss) from discontinued operations applicable to common stock(3)                                                                              |  |                                       | 0.70   |   |      |   | 0.07   |      |  |   | (4.57  | ) |  |      | (0.15  | ) |  |   | 0.29   |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) before extraordinary loss and cumulative effect of change in accounting principle                                                       |  |                                       | 0.28   |   |      |   | 0.09   |      |  |   | (13.92 | ) |  |      | (4.15  | ) |  |   | (1.49  | )
|Extraordinary loss on expropriation of Canadian ambulance service licenses(4)                                                                         |  |                                       |       |   |      |   |       |      |  |   |       |   |  |      | (0.08  | ) |  |   |       |  
|Cumulative effect of change in accounting principle(5)                                                                                                |  |                                       |       |   |      |   | (3.14  | )    |  |   |       |   |  |      | (0.04  | ) |  |   |       |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss)                                                                                                                                     |  | $                                     | 0.28   |   |      | $ | (3.05  | )    |  | $ | (13.92 | ) |  | $    | (4.27  | ) |  | $ | (1.49  | )
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average number of common shares outstanding:                                                                                                 |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Basic                                                                                                                                                 |  |                                       | 16,116 |   |      |   | 15,190 |      |  |   | 14,744 |   |  |      | 14,592 |   |  |   | 14,447 |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted                                                                                                                                               |  |                                       | 16,116 |   |      |   | 15,773 |      |  |   | 14,744 |   |  |      | 14,592 |   |  |   | 14,447 |  
|                                                                                                                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



5



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|                                                                 |  |                      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------- |  | -------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                 |  | Years Ended June 30, |         
|                                                                 |  | 2003                 |          |   | 2002 |   |          | 2001 |  |   | 2000     |   |  | 1999 |        
|                                                                 |  | As Restated (1)      |         
|                                                                 |  | (in thousands)       |         
|Balance Sheet Data                                               |  |                      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total assets                                                     |  | $                    | 196,166  |   |      | $ | 200,708  |      |  | $ | 264,006  |   |  | $    | 435,414 |   |  | $ | 485,847 |  
|Current portion of long-term debt(7)                             |  |                      | 1,329    |   |      |   | 1,633    |      |  |   | 294,439  |   |  |      | 299,104 |   |  |   | 5,765   |  
|Long-term debt, net of current portion(7)                        |  |                      | 305,310  |   |      |   | 298,529  |      |  |   | 1,286    |   |  |      | 2,850   |   |  |   | 268,560 |  
|Series B redeemable nonconvertible participating preferred stock |  |                      | 7,793    |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Stockholders equity (deficit)                                   |  |                      | (208,874 | ) |      |   | (205,752 | )    |  |   | (168,419 | ) |  |      | 36,257  |   |  |   | 98,469  |  
|Cash Flow Data                                                   |  |                      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Cash flow provided by (used in) operating activities             |  |                      | 13,146   |   |      |   | 9,634    |      |  |   | 6,710    |   |  |      | (8,537  | ) |  |   | 18,670  |  
|Cash flow provided by (used in) investing activities             |  |                      | (7,582   | ) |      |   | (5,832   | )    |  |   | (3,805   | ) |  |      | (13,640 | ) |  |   | (36,647 | )
|Cash flow provided by (used in) financing activities             |  |                      | (3,659   | ) |      |   | (3,170   | )    |  |   | (6,339   | ) |  |      | 25,996  |   |  |   | 20,807  |  

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|(1) | We have restated our consolidated financial statements for the following:
|--- | -------------------------------------------------------------------------



Accounts Receivable: As described in Note
2 to our consolidated financial statements, we determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and
the aggregate amounts of provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused our period-end
allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable to be overstated. We determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation
process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.



We determined that our consolidated financial statements for years prior to 2003 required restatement as a result of this matter. The portion of the
restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers has been reflected as a reduction of net revenue in the respective periods while the portion relating to uncollectible accounts has been
reflected as an adjustment to the provision for doubtful accounts in the respective periods. The after-tax effect of the related restatement adjustments increased our accumulated deficit as of June 30, 1998 by $60.0 million.



Enrollment Fees: We charge an enrollment fee for new subscribers under
our fire protection service contracts. We previously recognized these enrollment fees at the time of billing but have subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine
years.



We determined that our consolidated financial
statements for years prior to 2003 required restatement as a result of this matter. The after-tax effect of the related restatement adjustments increased our deferred revenue and accumulated deficit as of June 30, 1998 by $1.3 million. The effect of
the restatement adjustments on our operating income (loss) in fiscal 2002, 2001, 2000 and 1999 was immaterial.



San Diego Medical Services Enterprises, LLC:During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in
FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary
beneficiary. Accordingly, our investment in SDMSE



6



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should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not
impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.



Earnings Per Share: As described in Note 2 to our consolidated
financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B
redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date, (subject to approval by our shareholders of an increase
in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class
method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.



A summary of the statement of operations and balance sheet data impacted by
the restatement adjustments, the accounting change and the reclassification of discontinued operations is provided on the following page. Our historical cash flow data was not impacted by the restatements. See Note 2, Restatement of consolidated
financial statements in our Consolidated Financial Statements included elsewhere in this report.



7



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|                                                                                                                                          |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ----------------------- | - | ------- | ----------- | - | - | --------------------- | - | ---------------------------- | - | ----- | ----------- |  | - | -------- | - |  | - | ------ |  | - | ------- | - |  | - | -------- | -
|                                                                                                                                          |  | As Previously Reported                   |          |   | Restatement Adjustments |   |         | As Restated |   |   | Accounting Change (D) |   | Less LatinAmericanOperations |   |       | As Reported | 
|                                                                                                                                          |  |                                          | A        |   |                         | B |         |             | C |   |                       |   |                              |  
|Year ended June 30, 2003:                                                                                                                 |  | (in thousands, except per share amounts) |         
|Loss from continuing operations                                                                                                           |  | $                                        | (3,366   | ) |                         | $ |        |             |   | $ |                      |   |                              | $ |      |             |  | $ | (3,366   | ) |  | $ |       |  | $ |        |   |  | $ | (3,366   | )
|Net income                                                                                                                                |  |                                          | 8,966    |   |                         |   |        |             |   |   |                      |   |                              |   |      |             |  |   | 8,966    |   |  |   |       |  |   |        |   |  |   | 8,966    |  
|Basic loss from continuing operations applicable to common stock per share                                                                |  | $                                        | (0.44    | ) |                         |   |        |             |   |   |                      |   |                              | $ | 0.02  |             |  | $ | (0.42    | ) |  |   |       |  |   |        |   |  | $ | (0.42    | )
|Basic income per share                                                                                                                    |  | $                                        | 0.33     |   |                         |   |        |             |   |   |                      |   |                              | $ | (0.05 | )           |  | $ | 0.28     |   |  |   |       |  |   |        |   |  | $ | 0.28     |  
|Diluted loss from continuing operations applicable to common stock per share                                                              |  | $                                        | (0.44    | ) |                         |   |        |             |   |   |                      |   |                              | $ | 0.02  |             |  | $ | (0.42    | ) |  |   |       |  |   |        |   |  | $ | (0.42    | )
|Diluted income per share                                                                                                                  |  | $                                        | 0.33     |   |                         |   |        |             |   |   |                      |   |                              | $ | (0.05 | )           |  | $ | 0.28     |   |  |   |       |  |   |        |   |  | $ | 0.28     |  
|Year ended June 30, 2002:                                                                                                                 |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                                        | 497,038  |   |                         | $ | (1,669  | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 495,369  |   |  | $ | 19,005 |  | $ | (25,394 | ) |  | $ | 488,980  |  
|Provision for doubtful accounts                                                                                                           |  |                                          | 69,900   |   |                         |   | 871     |             |   |   |                      |   |                              |   |      |             |  |   | 70,771   |   |  |   | 7,109  |  |   | (155    | ) |  |   | 77,725   |  
|Operating income                                                                                                                          |  |                                          | 26,806   |   |                         |   | (2,540  | )           |   |   |                      |   |                              |   |      |             |  |   | 24,266   |   |  |   | 732    |  |   | (1,588  | ) |  |   | 23,410   |  
|Income from continuing operations before cumulative effect of change in accounting principle                                              |  |                                          | 3,889    |   |                         |   | (2,540  | )           |   |   |                      |   |                              |   |      |             |  |   | 1,349    |   |  |   |       |  |   | (979    | ) |  |   | 370      |  
|Net loss                                                                                                                                  |  |                                          | (45,624  | ) |                         |   | (2,540  | )           |   |   |                      |   |                              |   |      |             |  |   | (48,164  | ) |  |   |       |  |   |        |   |  |   | (48,164  | )
|Basic income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per
share   |  | $                                        | 0.26     |   |                         | $ | (0.17   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 0.09     |   |  | $ |       |  | $ | (0.07   | ) |  | $ | 0.02     |  
|Basic loss per share                                                                                                                      |  | $                                        | (3.00    | ) |                         | $ | (0.17   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (3.17    | ) |  | $ |       |  | $ |        |   |  | $ | (3.17    | )
|Diluted income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per
share |  | $                                        | 0.25     |   |                         | $ | (0.17   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 0.08     |   |  | $ |       |  | $ | (0.06   | ) |  | $ | 0.02     |  
|Diluted loss per share                                                                                                                    |  | $                                        | (2.89    | ) |                         | $ | (0.16   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (3.05    | ) |  | $ |       |  | $ |        |   |  | $ | (3.05    | )
|At June 30, 2002:                                                                                                                         |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                                        | 237,438  |   |                         | $ | (39,147 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 198,291  |   |  | $ | 2,417  |  | $ |        |   |  | $ | 200,708  |  
|Deferred revenue                                                                                                                          |  |                                          | 15,409   |   |                         |   |        |             |   |   | 1,286                 |   |                              |   |      |             |  |   | 16,695   |   |  |   |       |  |   |        |   |  |   | 16,695   |  
|Accumulated deficit                                                                                                                       |  |                                          | (313,025 | ) |                         |   | (39,147 | )           |   |   | (1,286                | ) |                              |   |      |             |  |   | (353,458 | ) |  |   |       |  |   |        |   |  |   | (353,458 | )
|Year ended June 30, 2001:                                                                                                                 |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                                        | 504,316  |   |                         | $ |        |             |   | $ |                      |   |                              | $ |      |             |  | $ | 504,316  |   |  | $ | 18,187 |  | $ | (43,089 | ) |  | $ | 479,414  |  
|Provision for doubtful accounts                                                                                                           |  |                                          | 102,470  |   |                         |   | (21,441 | )           |   |   |                      |   |                              |   |      |             |  |   | 81,029   |   |  |   | 7,274  |  |   | (1,427  | ) |  |   | 86,876   |  
|Operating loss                                                                                                                            |  |                                          | (192,453 | ) |                         |   | 21,441  |             |   |   |                      |   |                              |   |      |             |  |   | (171,012 | ) |  |   | 840    |  |   | 66,707  |   |  |   | (103,465 | )
|Loss from continuing operations                                                                                                           |  |                                          | (226,731 | ) |                         |   | 21,441  |             |   |   |                      |   |                              |   |      |             |  |   | (205,290 | ) |  |   |       |  |   | 67,358  |   |  |   | (137,932 | )
|Net loss                                                                                                                                  |  |                                          | (226,731 | ) |                         |   | 21,441  |             |   |   |                      |   |                              |   |      |             |  |   | (205,290 | ) |  |   |       |  |   |        |   |  |   | (205,290 | )
|Basic loss from continuing operations applicable to common stock per share                                                                |  | $                                        | (15.38   | ) |                         | $ | 1.46    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ | 4.57    |   |  | $ | (9.35    | )
|Basic loss per share                                                                                                                      |  | $                                        | (15.38   | ) |                         | $ | 1.46    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ |        |   |  | $ | (13.92   | )
|Diluted loss from continuing operations applicable to common stock per share                                                              |  | $                                        | (15.38   | ) |                         | $ | 1.46    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ | 4.57    |   |  | $ | (9.35    | )
|Diluted loss per share                                                                                                                    |  | $                                        | (15.38   | ) |                         | $ | 1.46    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ |        |   |  | $ | (13.92   | )
|At June 30, 2001:                                                                                                                         |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                                        | 298,534  |   |                         | $ | (36,607 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 261,927  |   |  | $ | 2,079  |  | $ |        |   |  | $ | 264,006  |  
|Deferred revenue                                                                                                                          |  |                                          | 14,707   |   |                         |   |        |             |   |   | 1,286                 |   |                              |   |      |             |  |   | 15,993   |   |  |   |       |  |   |        |   |  |   | 15,993   |  
|Accumulated deficit                                                                                                                       |  |                                          | (267,401 | ) |                         |   | (36,607 | )           |   |   | (1,286                | ) |                              |   |      |             |  |   | (305,294 | ) |  |   |       |  |   |        |   |  |   | (305,294 | )
|Year ended June 30, 2000:                                                                                                                 |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                                        | 570,074  |   |                         | $ | (22,621 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 547,453  |   |  | $ | 14,211 |  | $ | (52,607 | ) |  | $ | 509,057  |  
|Provision for doubtful accounts                                                                                                           |  |                                          | 160,623  |   |                         |   | (61,657 | )           |   |   |                      |   |                              |   |      |             |  |   | 98,966   |   |  |   | 6,942  |  |   | (2,597  | ) |  |   | 103,311  |  
|Operating loss                                                                                                                            |  |                                          | (109,320 | ) |                         |   | 39,036  |             |   |   |                      |   |                              |   |      |             |  |   | (70,284  | ) |  |   | 922    |  |   | 611     |   |  |   | (68,751  | )
|Loss from continuing operations                                                                                                           |  |                                          | (99,532  | ) |                         |   | 39,036  |             |   |   |                      |   |                              |   |      |             |  |   | (60,496  | ) |  |   |       |  |   | 2,066   |   |  |   | (58,430  | )
|Net loss                                                                                                                                  |  |                                          | (101,273 | ) |                         |   | 39,036  |             |   |   |                      |   |                              |   |      |             |  |   | (62,237  | ) |  |   |       |  |   |        |   |  |   | (62,237  | )
|Basic loss from continuing operations applicable to common stock per share                                                                |  | $                                        | (6.82    | ) |                         | $ | 2.67    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (4.15    | ) |  | $ |       |  | $ | 0.15    |   |  | $ | (4.00    | )
|Basic loss per share                                                                                                                      |  | $                                        | (6.94    | ) |                         | $ | 2.67    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (4.27    | ) |  | $ |       |  | $ |        |   |  | $ | (4.27    | )
|Diluted loss from continuing operations applicable to common stock per share                                                              |  | $                                        | (6.94    | ) |                         | $ | 2.67    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (4.27    | ) |  | $ |       |  | $ | 0.15    |   |  | $ | (4.00    | )
|Diluted loss per share                                                                                                                    |  | $                                        | (6.94    | ) |                         | $ | 2.67    |             |   | $ |                      |   |                              | $ |      |             |  | $ | (4.27    | ) |  | $ |       |  | $ |        |   |  | $ | (4.27    | )
|At June 30, 2000:                                                                                                                         |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                                        | 491,217  |   |                         | $ | (58,048 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 433,169  |   |  | $ | 2,245  |  | $ |        |   |  | $ | 435,414  |  
|Deferred revenue                                                                                                                          |  |                                          | 14,989   |   |                         |   |        |             |   |   | 1,286                 |   |                              |   |      |             |  |   | 16,275   |   |  |   |       |  |   |        |   |  |   | 16,275   |  
|Accumulated deficit                                                                                                                       |  |                                          | (40,670  | ) |                         |   | (58,048 | )           |   |   | (1,286                | ) |                              |   |      |             |  |   | (100,004 | ) |  |   |       |  |   |        |   |  |   | (100,004 | )
|Year ended June 30, 1999:                                                                                                                 |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                                        | 561,366  |   |                         | $ | (23,336 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 538,030  |   |  | $ | 14,164 |  | $ | (63,018 | ) |  | $ | 489,176  |  
|Provision for doubtful accounts                                                                                                           |  |                                          | 81,227   |   |                         |   | 13,719  |             |   |   |                      |   |                              |   |      |             |  |   | 94,946   |   |  |   | 7,001  |  |   | (465    | ) |  |   | 101,482  |  
|Operating income                                                                                                                          |  |                                          | 48,171   |   |                         |   | (37,055 | )           |   |   |                      |   |                              |   |      |             |  |   | 11,116   |   |  |   | 2,240  |  |   | (7,595  | ) |  |   | 5,761    |  
|Income (loss) from continuing operations                                                                                                  |  |                                          | 15,464   |   |                         |   | (37,055 | )           |   |   |                      |   |                              |   |      |             |  |   | (21,591  | ) |  |   |       |  |   | (4,143  | ) |  |   | (25,734  | )
|Net income (loss)                                                                                                                         |  |                                          | 15,464   |   |                         |   | (37,055 | )           |   |   |                      |   |                              |   |      |             |  |   | (21,591  | ) |  |   |       |  |   |        |   |  |   | (21,591  | )
|Basic income (loss) from continuing operations applicable to common stock per share                                                       |  | $                                        | 1.07     |   |                         | $ | (2.56   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (1.49    | ) |  | $ |       |  | $ | (0.29   | ) |  | $ | (1.78    | )
|Basic income (loss) per share                                                                                                             |  | $                                        | 1.07     |   |                         | $ | (2.56   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (1.49    | ) |  | $ |       |  | $ |        |   |  | $ | (1.49    | )
|Diluted income (loss) from continuing operations applicable to common stock per share                                                     |  | $                                        | 1.07     |   |                         | $ | (2.56   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (1.49    | ) |  | $ |       |  | $ | (0.29   | ) |  | $ | (1.78    | )
|Diluted income (loss) per share                                                                                                           |  | $                                        | 1.07     |   |                         | $ | (2.56   | )           |   | $ |                      |   |                              | $ |      |             |  | $ | (1.49    | ) |  | $ |       |  | $ |        |   |  | $ | (1.49    | )
|At June 30, 1999:                                                                                                                         |  |                                          |          |   |                         |   |         |             |   |   |                       |   |                              |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                                        | 579,907  |   |                         | $ | (97,084 | )           |   | $ |                      |   |                              | $ |      |             |  | $ | 482,823  |   |  | $ | 3,024  |  | $ |        |   |  | $ | 485,847  |  
|Deferred revenue                                                                                                                          |  |                                          | 14,909   |   |                         |   |        |             |   |   | 1,286                 |   |                              |   |      |             |  |   | 16,195   |   |  |   |       |  |   |        |   |  |   | 16,195   |  
|Retained earnings (accumulated deficit)                                                                                                   |  |                                          | 60,603   |   |                         |   | (97,084 | )           |   |   | (1,286                | ) |                              |   |      |             |  |   | (37,767  | ) |  |   |       |  |   |        |   |  |   | (37,767  | )



Restatement Adjustments:



|A | To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payersand doubtful accounts.
|- | ----------------------------------------------------------------------------------------------------------------------



|B | To defer enrollment fees relating to new fire protection service contracts.
|- | ---------------------------------------------------------------------------



|C | To calculate earnings per share using the two-class method.
|- | -----------------------------------------------------------



|D | Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.
|- | ---------------------------------------------------------------------------------------------------------



8



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|(2) | During the year ended June 30, 2001, the Company recorded asset impairments, restructuring and other charges totaling $122.1 million, including $46.3 million relating to its Latin
American operations which were disposed of in September 2002. See Note 5, Asset Impairments, Restructuring and Other Charges (Credits), in our consolidated financial statements. During the year ended June 30, 2000, the Company recorded restructuring
charges totaling $32.9 million relating to its decision to exit certain underperforming service areas.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Effective September 27, 2002, the Company sold its Latin American operations to local management in exchange for the assumption of such operations net liabilities. The gain on
the disposition totaled $12.5 million. For financial reporting purposes, the Companys former Latin American operations have been classified as discontinued operations. See Note 4, Disposition of Latin American Operations in our consolidated
financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | During the year ended June 30, 2000, we recorded an extraordinary loss on the expropriation of Canadian ambulance service licenses of approximately $1.2 million (net of $0 of income
taxes). We received approximately $2.2 million from the Ontario Ministry of Health as compensation for the loss of license and incurred costs and wrote-off assets, mainly goodwill, totaling $3.4 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS 142). In connection with the adoption of SFAS
142, the Company discontinued amortizing its goodwill effective July 1, 2001. Additionally, the Company recognized an approximate $49.5 million transitional impairment charge (both before and after tax), which has been reflected as the cumulative
effect of change in accounting principle in fiscal 2002. See Note 7, Goodwill, in our consolidated financial statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Effective July 1, 1999, the Company changed its method of accounting for start-up costs, including organization costs. In connection with that change, the
Company wrote-off $0.9 million of previously capitalized organization costs ($0.5 million after tax benefits) and classified such charge as the cumulative effect of change in accounting principle in 2000.



|(6) | As described in Note 2 to our consolidated financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the
two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares
before the December 31, 2004 mandatory redemption date (subject to approval by our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends
declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in
earnings or losses as if such earnings or losses for the period had been distributed.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Our current liabilities exceeded our current assets at June 30, 2001 and 2000 as a result of the classification of amounts outstanding under our revolving credit facility and our 7
7/8% Senior Notes due 2008 (Senior Notes) as current liabilities. Such classification resulted from the fact that we were not in compliance with certain of the covenants contained in our revolving credit agreement and because of the related
provisions contained in the agreement relating to our Senior Notes. Amounts outstanding under our revolving credit facility and our Senior Notes were classified as long-term liabilities as of June 30, 2003 and 2002 as a result of amendments to our
credit facility the most recent of which became effective September 26, 2003. Such amendments waived previous covenant violations and extended the maturity date of the credit facility from March 16, 2003 to December 31, 2006. See Note 12, Long-Term
Debt, in our consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



---

|ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The following discussion and analysis should be read in conjunction with our
Selected Financial Data and our Consolidated Financial Statements and notes appearing elsewhere in this Report.



Restatement of Consolidated Financial Statements



We have restated our consolidated financial statements for the following:



Accounts Receivable



As described in Note 2 to our consolidated financial statement, we determined that collections on accounts receivable relating to medical transportation
revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the aggregate amount of provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful
accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused our period-end allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable to be overstated. We determined
that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts
through March 31, 2003.



We determined that our consolidated
financial statements of prior years required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers has been reflected as a reduction of
net revenue in the respective periods while the portion relating to uncollectible accounts has been reflected as an adjustment to the provision for doubtful accounts in the respective periods. The after-tax effect of the related restatement
adjustments increased our accumulated deficit as of June 30, 2000 by $58.0 million.



The restatement adjustments relating to medical transportation accounts receivable outlined above caused us to violate the minimum tangible net worth covenant contained in our 2002 Amended Credit Facility. This
situation also resulted in a delay in the filing of our Quarterly Report on Form 10-Q for the three months ended March 31, 2003. Such delay caused us to not be in compliance with the financial reporting covenants contained in our 2002 Amended Credit
Facility as well as the indenture relating to the Senior Notes. As described in Note 12 to our consolidated financial statements, we negotiated a further amendment to our credit facility effective September 30, 2003. As a result of that amendment,
all previous instances of non-compliance were permanently waived. See Liquidity and Capital Resources.



Enrollment Fees



We charge an enrollment fee for new subscribers under our fire protection service contracts. We previously recognized these fees at the time of billing
but have subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.



We determined that our consolidated financial statements of prior years required restatement as a result of this matter. The after-tax effect of the
related restatement adjustments increased our deferred revenue and accumulated deficit as of June 30, 2000 by $1.3 million. The effect of the restatement adjustments on our operating income (loss) in fiscal 2002 and 2001 was immaterial.



San Diego Medical Services Enterprise LLC



During the fourth quarter of fiscal 2003, we adopted Financial Accounting
Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that
term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we
are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously
reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.



10



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Disposal of Latin American Operations



Due to deteriorating economic conditions and the continued devaluation of
the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective
September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of such operations net liabilities. The gain on the disposition of our Latin American operations totaled $12.5 million and is included
in income from discontinued operations for the year ended June 30, 2003. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including accounts receivable of $0.6 million and accrued liabilities of $4.8 million) as well
as the recognition of related cumulative translation adjustments of $10.1 million.



Earnings Per Share



As
described in Note 2 to our consolidated financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance
in September 2002 of our Series B redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date (subject to approval by
our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued
common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been
distributed.



Introduction



We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency medical calls (emergency ambulance services) and non-emergency transport services (general transport services) to patients on both a fee-for-service and nonrefundable
subscription fee basis. Per transport revenue depends on various factors, including the mix of rates between existing markets and new markets and the mix of activity between emergency ambulance services and non-emergency transport services as well
as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts or other agencies or on a nonrefundable subscription fee basis to individual homeowners or commercial property owners.



Because of the nature of our ambulance services, it is
necessary to respond to a number of calls, primarily emergency ambulance service calls, which may not result in transports. Results of operations are discussed below on the basis of actual transports because transports are more directly related to
revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of calls not resulting in transports varies substantially depending upon the mix of non-emergency ambulance and emergency
ambulance service calls in individual markets and is generally higher in service areas in which the calls are primarily emergency ambulance service calls. Rates in our markets take into account the anticipated number of calls that may not result in
transports. We do not separately account for expenses associated with calls that do not result in transports.



Critical Accounting Estimates and Judgments



Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of our financial statements, we are required to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, general liability and
workers compensation claim reserves. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the



11



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circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.



We have identified the following accounting policies as critical to our business operations and the understanding of our results of operations. The impact
of these policies on our business operations is discussed throughout Managements Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. The discussion
below is not intended to be a comprehensive list of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our consolidated financial statements, which contains accounting policies
and other disclosures required by accounting principles generally accepted in the United States of America.



Medical Transportation and Revenue Recognition  Ambulance and alternative transportation service fees are recognized when services are
provided and are recorded net of discounts applicable to Medicare, Medicaid, and other third-party payers. Because of the length of the collection cycle with respect to ambulance and alternative transportation service fees, it is necessary to
estimate the amount of these discounts at the time revenue is recognized. Discounts are estimated based on historical collection data, historical write-off activity and current relationships with payers, within each service area. Estimated discounts
are translated into a percentage of gross revenue, which is applied to calculate the provision. If the historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, revenue
could be overstated or understated. Discounts applicable to Medicare, Medicaid and other third-party payers, which are reflected as a reduction of medical transportation revenue, totaled $160.0 million, $148.2 million and $145.9 million for the
years ended June 30, 2003, 2002 and 2001, respectively.



Provision for Doubtful Accounts for Medical Transportation Revenue  Ambulance and alternative transportation service fees are billed to various payer sources. As discussed above, discounts applicable to Medicare, Medicaid and
other third-party payers are recorded as reductions of gross revenue. We also estimate provisions related to the potential uncollectibility of amounts billed to other payers based on historical collection data and historical write-off activity
within each service area. The provision for doubtful accounts percentage that is applied to ambulance and alternative transportation service fee revenue is calculated as the difference between the total expected collection percentage less
percentages applied for discounts applicable to Medicare, Medicaid and other third-party payers described above. If historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue
stream, the provision for doubtful accounts may be overstated or understated. The provision for doubtful accounts on ambulance and alternative transportation service revenue totaled $84.9 million, $77.7 million and $82.1 million for the fiscal years
ended June 30, 2003, 2002 and 2001, respectively.



Workers Compensation Reserves  Beginning May 1, 2002, we purchased corporate-wide workers compensation insurance policies, for which we pay premiums that can be adjusted upward or downward at certain intervals based
upon a retrospective review of incurred losses. Each of these annual policies covers all workers compensation claims made by employees of our domestic subsidiaries. Under such policies, we have no obligation to pay any deductible amounts on
claims occurring during the policy period. Accordingly, provisions for workers compensation expense for claims arising on and after May 1, 2002 are reflective of premium costs only. Prior to May 1, 2002, our workers compensation policies
included a deductible obligation with no aggregate limit. Claims relating to these policy years remain outstanding. Claim provisions were estimated based on historical claims data and the ultimate projected value of those claims. For claims
occurring prior to May 1, 2002, our third-party administrator established initial estimates at the time a claim was reported and periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent
actuaries to assist us in the determination of our workers compensation claims reserves. If the ultimate development of these claims is significantly different than has been estimated, the related reserves for workers compensation claims
could be overstated or understated. Reserves related to workers compensation claims totaled $11.3 million and $15.9 million at June 30, 2003 and 2002, respectively.



General Liability Reserves  We are subject to litigation arising in the ordinary course of our business. In
order to minimize the risk of our exposure, we maintain certain levels of coverage for comprehensive general liability, automobile liability, and professional liability. These policies currently are, and historically have been, underwritten on a
deductible basis. Provisions are made to record the cost of premiums as well as that portion of the claims that is our responsibility. Our third-party administrator establishes initial estimates at the time a claim is reported and



12



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periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the
determination of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to
general liability claims totaled $13.9 million and $15.4 million at June 30, 2003 and 2002, respectively.



Asset Impairment  We review our property and equipment for impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable, by comparing the carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted cash flows are less than the related carrying
amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate commensurate with
the risks involved.



Our goodwill balances are reviewed
annually (and interim periods if events or circumstances indicate that the related carrying amount may be impaired). Goodwill impairment is reviewed using a two-step process. The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second
step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the
goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.



13



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Results of Operations



The following table sets forth certain items from our consolidated statement of operations expressed as a percentage of net revenue for fiscal years 2003,
2002, and 2001:



|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | - |  | -------------- | -- |  | ----- | --
|                                                                                                                               |  | Years Ended June 30, |  
|                                                                                                                               |  | 2003                 |   |  | 2002           |    |  | 2001  |   
|                                                                                                                               |  |                      |   |  | (As Restated*) |   
|Net revenue                                                                                                                    |  | 100.0                | % |  | 100.0          | %  |  | 100.0 | % 
|Operating expenses:                                                                                                            |  |                      |   |  |                |    |  |       |   
|Payroll and employee benefits                                                                                                  |  | 54.6                 |   |  | 55.0           |    |  | 56.7  |   
|Provision for doubtful accounts                                                                                                |  | 16.3                 |   |  | 15.9           |    |  | 18.1  |   
|Depreciation and amortization                                                                                                  |  | 2.5                  |   |  | 3.3            |    |  | 5.4   |   
|Other operating expenses                                                                                                       |  | 21.8                 |   |  | 21.1           |    |  | 27.5  |   
|Asset impairment charges                                                                                                       |  |                     |   |  |               |    |  | 10.0  |   
|Contract termination costs and related asset impairment charges                                                                |  |                     |   |  |               |    |  | 1.9   |   
|Restructuring and other                                                                                                        |  | (0.2                 | ) |  | (0.1           | )  |  | 1.9   |   
|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|Operating income (loss)                                                                                                        |  | 5.0                  |   |  | 4.8            |    |  | (21.5 | ) 
|Interest expense                                                                                                               |  | (5.4                 | ) |  | (5.2           | )  |  | (6.4  | ) 
|Interest income                                                                                                                |  | 0.0                  |   |  | 0.1            |    |  | 0.1   |   
|Other income (expense), net                                                                                                    |  | 0.0                  |   |  | 0.0            |    |  | (0.8  | ) 
|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|Loss from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle |  | (0.4                 | ) |  | (0.3           | )  |  | (28.6 | ) 
|Income tax (provision) benefit                                                                                                 |  | 0.0                  |   |  | 0.5            |    |  | (0.2  | ) 
|Minority interest                                                                                                              |  | (0.3                 | ) |  | (0.1           | )  |  | (0.1  | ) 
|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|Loss from continuing operations before cumulative effect of change in accounting principle                                     |  | (0.7                 | ) |  | 0.1            |    |  | (28.7 | ) 
|Income (loss) from discontinued operations                                                                                     |  | 2.4                  |   |  | 0.2            |    |  | (14.1 | ) 
|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|Income (loss) before cumulative effect of change in accounting principle                                                       |  | 1.7                  |   |  | 0.3            |    |  | (42.8 | ) 
|Cumulative effect of a change in accounting principle                                                                          |  |                     |   |  | (10.1          | )  |  |      |   
|                                                                                                                               |  |                      |   |  |                |    |  |       |   
|Net income (loss)                                                                                                              |  | 1.7                  | % |  | (9.8           | )% |  | (42.8 | )%
|                                                                                                                               |  |                      |   |  |                |    |  |       |   



* - Refer to Note 2 of our
consolidated financial statements.



Year Ended June 30, 2003 Compared To
Year Ended June 30, 2002



Net Revenue



Net revenue increased approximately $31.5 million, or 6.4%, from $489.0
million for the year ended June 30, 2002 to $520.5 million for the year ended June 30, 2003.



Medical Transportation and Related Services Medical transportation and related service revenue increased $25.2 million, or 6.0% from $416.9 million for the year ended June 30, 2002 to $442.1 million for
the year ended June 30, 2003. This increase is primarily comprised of a $28.0 million increase in same service area revenue attributable to rate increases, call screening and other factors. Additionally, there was a $3.3 million increase in revenue
related to two new 911 contracts that began during fiscal 2003 offset by an $2.0 million decrease related to the loss of the 911 contract in Arlington, Texas and a $4.2 million decrease related to service areas which were closed in fiscal
2002.



Total transports, including alternative
transportation, decreased 45,000 or 3.6% from 1,267,000 (1,122,000 ambulance and 145,000 alternative transportation) for the year ended June 30, 2002 to 1,222,000 (1,122,000



14



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ambulance and 100,000 alternative transportation) for the year ended June 30, 2003. Transports in areas that we served in both fiscal 2003 and 2002 decreased
by approximately 34,000 transports. Additionally, there was an increase of 6,000 transports related to two 911 contracts that began during the fiscal 2003 offset by a 4,000 transport decrease related to the loss of the 911 contract in Arlington and
a 13,000 transport decrease related to service areas which were closed in fiscal 2002.



Fire and Other Fire protection services revenue increased by $5.0 million, or 7.9%, from $63.4 million for the year ended June 30, 2002 to $68.4 million for the year ended June 30, 2003. Fire protection
services revenue increased primarily due to rate and utilization increases in our subscription fire programs of $2.6 million, rate increases on existing contracts and additional fire contracts of $1.5 million and a $0.7 million increase in wild land
fire services revenue. We experienced a particularly active wildfire season in the fiscal year ended June 30, 2003.



Other revenue increased by $1.3 million, or 14.9%, from $8.7 million for the year ended June 30, 2002 to $10.0 million for the year ended June 30, 2003.
Other revenue changes relate to changes in revenues from dispatch, fleet, billing, training and home health care services.



Operating Expenses



Payroll and Employee Benefits Payroll and employee benefits expenses increased $14.9 million, or 5.2%, from $269.1 million for the year
ended June 30, 2002 to $284.0 million for the year ended June 30, 2003 but remained consistent as a percentage of net revenue between years. The increase is primarily related to increased health insurance costs of $2.5 million primarily due to
increased health insurance claims, increased workers compensation expense of $2.4 million related to increased insurance rates and general wage increases. We expect that our labor costs will continue to increase.



Provision for Doubtful Accounts The provision for doubtful
accounts includes provision for ambulance and alternative transportation service revenue as well as non-transport related revenue. The provision for doubtful accounts increased $7.3 million, or 9.4%, from $77.7 million, or 15.9% of net revenue, for
the year ended June 30, 2002 to $85.0 million, or 16.3% of net revenue, for the year ended June 30, 2003.



The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue has remained relatively consistent with
the prior year. The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue was 19.2% for the year ended June 30, 2003 and 18.6% for the year ended June 30, 2002. The increase in the provision for
doubtful accounts as a percentage of ambulance and alternative transportation revenue relates to the changes in the mix of the relationship between Medicare, Medicaid and other third-party payer discounts and doubtful accounts.



A summary of activity in our allowance for doubtful accounts during the
fiscal years ended June 30, 2003 and 2002 is as follows (in thousands):



|                                                |  |          |         |   |                |   |          |  
|----------------------------------------------- |  | -------- | ------- | - | -------------- | - | -------- | -
|                                                |  | June 30, |        
|                                                |  | 2003     |         |   | 2002           |  
|                                                |  |          |         |   | (As Restated*) |  
|Balance at beginning of year                    |  | $        | 37,966  |   |                | $ | 60,812   |  
|Provision for doubtful accounts  Domestic      |  |          | 85,046  |   |                |   | 77,725   |  
|Provision for doubtful accounts - Latin America |  |          |        |   |                |   | 155      |  
|Write-offs related to doubtful accounts         |  |          | (74,590 | ) |                |   | (100,726 | )
|                                                |  |          |         |   |                |   |          |  
|Balance at end of year                          |  | $        | 48,422  |   |                | $ | 37,966   |  
|                                                |  |          |         |   |                |   |          |  



|* | Refer to Note 2, of our consolidated financial statements.
|- | ----------------------------------------------------------



Depreciationand Amortization  Depreciation and amortization decreased $3.0 million, or 18.4%, from $16.3 million for the year ended
June 30, 2002 to $13.3 million for the year ended June 30, 2003, primarily due to assets



15



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becoming fully depreciated. Depreciation and amortization decreased from 3.3% of net revenue for the year ended June 30, 2002 to approximately 2.5% of total
revenue for the year ended June 30, 2003.



Other Operating
Expenses Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel, and professional fees. Other operating expenses increased
$10.2 million, or 9.9%, from $103.3 million for the year ended June 30, 2002 to $113.5 million for the year ended June 30, 2003. The increase in other operating expenses is primarily due to increases in general liability insurance expenses of $6.1
million due to increased premium rates, professional fees of $1.6 million related to the amendment of our credit facility on September 30, 2002 and general increases in other operating expense categories. Other operating expenses increased from
21.1% of total revenue for the year ended June 30, 2002 to 21.8% of total revenue for the year ended June 30, 2003.



Restructuring and Other Fiscal 2003 includes the reversal of restructuring charges of $1.4 million originally recorded in fiscal 2001. The
restructuring charge recorded in fiscal 2001 included $1.5 million for severance, lease termination and other costs relating to an under performing service area that we had planned to exit at the time of contract expiration in December 2001. During
fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, we reversed $0.2 million of
previously accrued lease termination costs relating to the extension period, which was reflected as a credit to restructuring and other in the consolidated statement of operations for fiscal 2002. The operating environment in this service area
improved, and in November 2002 we were awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million was released to income during fiscal 2003. In addition to this reversal, several other individually insignificant
adjustments were made to prior restructuring charges in fiscal 2003.



A summary of activity in the restructuring reserve, which is included in accrued liabilities in the consolidated balance sheet, is as follows:



|                         |  |                 |        |   |                         |   |        |                  |  |   |       |   |  |   |        |  
|------------------------ |  | --------------- | ------ | - | ----------------------- | - | ------ | ---------------- |  | - | ----- | - |  | - | ------ | -
|                         |  | Severance Costs |        |   | Lease Termination Costs |   |        | Other Exit Costs |  |   | Total |  
|Balance at June 30, 2001 |  | $               | 1,834  |   |                         | $ | 3,234  |                  |  | $ | 1,101 |   |  | $ | 6,169  |  
|Fiscal 2002 usage        |  |                 | (1,025 | ) |                         |   | (1,172 | )                |  |   | (951  | ) |  |   | (3,148 | )
|Adjustments              |  |                 | (52    | ) |                         |   | (548   | )                |  |   | (118  | ) |  |   | (718   | )
|                         |  |                 |        |   |                         |   |        |                  |  |   |       |   |  |   |        |  
|Balance at June 30, 2002 |  |                 | 757    |   |                         |   | 1,514  |                  |  |   | 32    |   |  |   | 2,303  |  
|Fiscal 2003 usage        |  |                 | (29    | ) |                         |   | (207   | )                |  |   | (71   | ) |  |   | (307   | )
|Adjustments              |  |                 | (718   | ) |                         |   | (732   | )                |  |   | 39    |   |  |   | (1,421 | )
|                         |  |                 |        |   |                         |   |        |                  |  |   |       |   |  |   |        |  
|Balance at June 30, 2003 |  | $               |       |   |                         | $ | 575    |                  |  | $ |      |   |  | $ | 575    |  
|                         |  |                 |        |   |                         |   |        |                  |  |   |       |   |  |   |        |  



The restructuring
reserve as of June 30, 2003 relates to lease termination costs for which payments will be made through December 2006.



Interest Expense Interest expense increased by approximately $2.5 million, or 9.8%, from $25.5 million for the year ended June 30, 2002 to
$28.0 million for the year ended June 30, 2003. This increase was primarily due to increased interest rates resulting from the renegotiation of our credit facility in September 2002. Amortization of deferred financing costs totaled $2.0 million for
the year ended June 30, 2003 compared to $0.7 million for the year ended June 30, 2002. See further discussion of the 2002 Amended Credit Facility in Liquidity and Capital Resources.



Interest Income Interest income decreased $0.4 million or 66.7%
from $0.6 million for the year end June 30, 2002 to $0.2 million for the year ended June 30, 2003. The year ended June 30, 2002 included $0.5 million of income received in conjunction with an income tax refund.



Income Taxes We recorded an income tax provision of $0.2
million in 2003 compared to an income tax benefit of $2.5 million in 2002. The income tax benefit in 2002 resulted from federal income tax refunds of $0.6 million resulting from legislation that allowed us to carry back a portion of our net
operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition had been deferred until receipt. We did



16



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not recognize the future income tax benefits attributable to our domestic net operating losses in either 2003 or 2002 as it is more likely than not that the
related benefits will not be realized.



Income (Loss) From
Discontinued Operations  Due to deteriorating economic conditions and the continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including
Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net liabilities. The gain
on the disposition of our Latin American operations totaled $12.5 million and is included in income from discontinued operations for the year ended June 30, 2003. Medical transportation and related service revenue related to our Latin American
operations totaled $2.1 million and $23.9 million for the years ended June 30, 2003 and 2002, respectively. Fire and Other revenue related to our Latin American operations totaled $0.3 million and $1.5 million for the years ended June 30, 2003, and
2002 respectively. Our Latin American operations generated a net loss of $156,000 through September 27, 2002 and net income of $1.0 million for the year ended June 30, 2002.



Cumulative Effect of Change in Accounting Principle  We adopted the new rules on accounting for goodwill and
other intangible assets effective July 1, 2001. Under the transitional provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we performed impairment tests on the net goodwill and
other intangible assets associated with each of our reporting units with the assistance of independent valuation experts and determined that a transitional goodwill impairment charge of $49.5 million, both before and after tax, was required. The
impairment charge primarily related to our domestic medical transportation and related services segment. See Note 7 of our consolidated financial statements for further discussion of the effect of the adoption of this accounting principle.



Year Ended June 30, 2002 Compared To Year Ended June 30, 2001



Net Revenue



Net revenue increased $9.6 million, or 2.0%, from $479.4 million for the
year ended June 30, 2001 to $489.0 million for the year ended June 30, 2002.



Medical Transportation and Related Services Medical transportation and related service revenue increased $8.7 million, or 2.1%, from $408.2 million for the year ended June 30, 2001 to $416.9 million for
the year ended June 30, 2002. This increase is comprised of a $23.5 million increase in same service area revenue attributable to rate increases, call screening and other factors. Additionally, there was a $2.6 million increase in revenue related to
a 911 contract that began during the second quarter of fiscal 2001 offset by an $8.5 million decrease related to the loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska and a $9.6 million decrease related to the closure of service areas
in fiscal 2000 and fiscal 2001.



Total domestic transports,
including alternative transportation, decreased 66,000, or 5.0%, from 1,333,000 (1,172,000 ambulance and 161,000 alternative transportation) for the year ended June 30, 2001 to 1,267,000 (1,222,000 ambulance and 145,000 alternative transportation)
for the year ended June 30, 2002. The loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska accounted for a decrease of approximately 19,000 transports. The closure of service areas in fiscal 2000 and 2001 accounted for a decrease of
approximately 32,000 transports. Transports in areas that we served in both the year ended June 30, 2002 and 2001 decreased by approximately 18,000 transports. These decreases were offset by an increase of approximately 3,000 transports related to a
911 contract that began during the second quarter of fiscal 2001.



Fire and Other Fire protection services revenue increased by $3.0 million, or 5.0%, from $60.4 million for the year ended June 30, 2001 to $63.4 million for the year ended June 30, 2002. Fire protection services revenue
increased primarily due to rate and utilization increases in our subscription fire programs of $2.1 million, increased contracting activity by our specialty fire protection group of $766,000 and a $620,000 increase in wild land fire services
revenue. We experienced a particularly active wildfire season in the latter part of fiscal 2002.



17



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Other Revenue Other revenue decreased by $2.1 million, or 19.4%, from $10.8 million for the
year ended June 30, 2001 to $8.7 million for the year ended June 30, 2002. The decrease in other revenue results from changes in the composition of revenues from dispatch, fleet, billing, training and home health care services between years.



Operating Expenses



Payroll and Employee Benefits Payroll and employee benefits
expenses decreased $2.9 million, or 1.1%, from $272.0 million for the year ended June 30, 2001 to $269.1 million for the year ended June 30, 2002. Payroll and employee benefits decreased from 56.7% of net revenue for the year ended June 30, 2001 to
55.0% of net revenue for the year ended June 30, 2002. This decrease is primarily attributable to the net impact of payroll and benefit increases resulting from contract renegotiations, service area expansions and wage rate increases ($19.5 million)
offset by the impact of prior-year service area closures ($8.3 million), and the absence in 2002 of prior-year increases in health insurance reserves ($5.4 million) and accrued paid-time-off ($3.0 million).



Provision for Doubtful Accounts The provision for doubtful
accounts includes provision for ambulance and alternative transportation service revenue as well as non-transport related revenue. The provision for doubtful accounts decreased $9.2 million, or 10.6%, from $86.9 million, or 18.1% of net revenue, for
the year ended June 30, 2001 to $77.7 million, or 15.9% of net revenue, for the year ended June 30, 2002. The provision for the year ended June 30, 2001 included an additional $4.8 million provision related to managements decision to reserve
all outstanding non-transport receivables in excess of 90 days.



The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue was 18.6% for the year ended June 30, 2002 and 20.1% for the year ended June 30, 2001. The decrease is reflective of the closure
of underperforming operations and increases in collection rates in the remaining service areas. During fiscal 2002, we continued to focus on improving the quality of our revenue by reducing the amount of un-reimbursed non-emergency ambulance and
alternative transportation transports in selected service areas as well as on previously implemented initiatives to maximize the collection of our accounts receivable.



A summary of activity in our allowance for doubtful accounts during the fiscal years ended June 30, 2002 and 2001 is as
follows (in thousands):



|                                                |  |                |          |   |      |   |          |  
|----------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                                |  | June 30,       |         
|                                                |  | 2002           |          |   | 2001 |  
|                                                |  | (As Restated*) |         
|Balance at beginning of year                    |  | $              | 60,812   |   |      | $ | 88,120   |  
|Provision for doubtful accounts - Domestic      |  |                | 77,725   |   |      |   | 86,876   |  
|Provision for doubtful accounts - Latin America |  |                | 155      |   |      |   | 1,427    |  
|Write-offs related to doubtful accounts         |  |                | (100,726 | ) |      |   | (115,611 | )
|                                                |  |                |          |   |      |   |          |  
|Balance at end of year                          |  | $              | 37,966   |   |      | $ | 60,812   |  
|                                                |  |                |          |   |      |   |          |  



|* | Refer to Note 2, of our consolidated financial statements.
|- | ----------------------------------------------------------



Depreciation and Amortization  Depreciation and amortization decreased $9.4 million, or 36.6%, from $25.7 million for the year ended June 30,
2001 to $16.3 million for the year ended June 30, 2002. We discontinued amortizing goodwill in accordance with our adoption of SFAS No. 142, effective July 1, 2001. As a result, amortization of intangibles decreased $4.6 million to $1.1 million for
the year ended June 30, 2002. Approximately, $1.0 million of the amortization recorded in the year ended June 30, 2002 relates to an adjustment in the estimated lives of certain other intangible assets acquired in previous business combinations.
Amortization is expected to decline as these assets reach the end of their estimated lives. See related discussion of the effect of the adoption of SFAS No. 142 below. In addition, there was a decrease in depreciation expense of $4.8 million
primarily due to asset write-offs during the fourth quarter of fiscal 2001, the disposal of certain assets related to closed operations and a decrease in capital expenditures. Depreciation and amortization decreased from 5.4% of net revenue for the
year ended June 30, 2001 to 3.3% of net revenue for the year ended June 30, 2002.



18



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Other Operating Expenses Other operating expenses consist primarily of rent and related
occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel, and professional fees. Other operating expenses decreased $28.6 million, or 21.7%, from $131.9 million for the year ended June 30, 2001 to
$103.3 million for the year ended June 30, 2002. Approximately $13.8 million of the decrease relates to charges taken in the fourth quarter of fiscal 2001, including $8.4 million of inventory adjustments as described below, $1.3 million related to a
Medicare audit settlement, $1.0 million related to the write-off of amounts owed to us by a former owner and $3.1 million for several adjustments to certain estimates for prepaid expenses, accrued liabilities and other items that were resolved in
the fourth quarter of fiscal 2001. Additionally, the year ended June 30, 2001 included a charge of $15.0 million recorded for additional general liability reserves related to increases in reserves for reported claims as well as to establish reserves
for claims incurred but not reported as described below. Closure of service areas in fiscal 2000 and 2001, as well as the loss of the 911 contracts in Arlington, Texas and Lincoln, Nebraska, account for $3.1 million of the decrease. Other operating
expenses decreased from 27.5% of net revenue for the year ended June 30, 2001 to 21.1% for fiscal 2002.



Effective January 1, 2001, we refined our methodology for determining reserves related to general liability claims. The changing environment with respect
to the rising cost of claims as well as the cost of litigation prompted a comprehensive review by management of detailed information from external advisors, historical settlement information and analysis of open claims. The new method more closely
approximates the potential outcome of each open claim as well as costs related to the administration of these claims. Additionally, reserves were established for unreported claims based on historical occurrences of claims filed subsequent to the end
of the policy year. For financial reporting purposes, this change was treated as a change in accounting estimate.



Medical, fleet, and fire supplies are maintained in a central warehouse, numerous regional warehouses, and multiple stations, lockers, and vehicles. A
physical inventory of all locations at June 30, 2001 revealed a shortage from recorded levels. Shrinkage, obsolescence, and supplies lost due to closures accounted for most of the shortage. To reduce the recorded inventory to the actual physical
count, an adjustment of approximately $8.4 million was recorded as a component of other operating expenses in fiscal 2001.



Asset Impairment Charges  In connection with the budgeting process for the fiscal year ended June 30, 2002, which was completed in the fourth
quarter of fiscal 2001, we analyzed each cost center within our various service areas not identified for closure or downsizing to determine whether the associated long-lived assets (e.g., property, equipment and goodwill) would be recoverable from
future operating cash flows. Cost centers represent individual operating units within a given service area for which separately identifiable cash flow information is available. We performed this analysis as a result of our expectations of a
challenging health care reimbursement environment as well as anticipated increases in labor and insurance costs with respect to our ambulance operations. This analysis considered the results of operations over the past year as well as the Centers
for Medicare and Medicaid Services (CMS) failure to implement the ambulance fee schedule as of January 1, 2001. The analysis with respect to our Argentine operations included the impact of the deteriorating economic and political environment
as well as information developed by a third party concerning the marketability of these operations during fiscal 2001.



In order to assess recoverability, we estimated the related net future cash flows for each cost center and then compared the resulting undiscounted
amounts to the carrying value of each cost centers long-lived assets (e.g., property and equipment and goodwill). It should be noted that property and equipment balances are specifically identified with each cost center. Additionally, goodwill
is specifically identified with each cost center at the time of acquisition and, therefore, related allocations were not necessary for purposes of performing the impairment analysis.



19



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For those cost centers where estimated future net cash flows on an undiscounted basis were less than the
related carrying amounts of the long-lived assets, an asset impairment was considered to exist. We measured the amount of the asset impairment for each such cost center by discounting the estimated future net cash flows using a discount rate of
18.5% and comparing the resulting amount to the carrying value of its long-lived assets. Based upon this analysis, we determined that asset impairment charges approximating $94.4 million were required for cost centers within our domestic and
Argentine ambulance operations. The asset impairments were charged directly against the related asset balances. A summary of the related charge is as follows:



|                               |  |                |        |                               |   |       |  |   |       
|------------------------------ |  | -------------- | ------ | ----------------------------- | - | ----- |  | - | ------
|                               |  | Goodwill       |        | Property, Equipment and Other |   | Total
|                               |  | (in thousands)
|Domestic ambulance operations  |  | $              | 41,631 |                               | $ | 6,419 |  | $ | 48,050
|Argentine ambulance operations |  |                | 44,327 |                               |   | 1,976 |  |   | 46,303
|                               |  |                |        |                               |   |       |  |   |       
|Total                          |  | $              | 85,958 |                               | $ | 8,395 |  | $ | 94,353
|                               |  |                |        |                               |   |       |  |   |       



As a result of the
sale of our Latin American operations in September 2002, the asset impairment charge related to our Argentine ambulance operations is included in the loss from discontinued operations for the year ended June 30, 2001. Effective July 1, 2001 we
changed our method of accounting for goodwill including the manner in which goodwill impairments are assessed. See discussion of Cumulative Effect of Change in Accounting Principle.



Contract Termination Costs and Related Asset Impairment In November 2000, we learned that our exclusive 911
contract in Lincoln, Nebraska would not be renewed effective December 31, 2000 and in connection therewith, we recorded a contract termination charge of $5.2 million. This charge included asset impairments for related goodwill and equipment totaling
$4.3 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1995), $0.8 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease terminations and other exit costs.
The Lincoln contract generated net revenue of $4.7 million, operating income of $0.4 million and cash flow of $0.5 million in fiscal 2000, its last full year of operations.



In May 2001, we learned that our exclusive 911 contract in Arlington, Texas would not be renewed effective September 30,
2001 and in connection therewith, we recorded a contract termination charge of $4.1 million. This charge included asset impairments for related goodwill and equipment of $3.9 million (the exclusive 911 contract was acquired in a purchase business
combination in fiscal 1997), $0.1 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease termination and other exit costs. The Arlington contract generated revenue of $8.3 million, operating income of
$0.1 million and cash flow of $0.5 million in fiscal 2001, its last full year of operations.



Restructuring and Other During the fourth quarter of the fiscal year ended June 30, 2001, we decided to close or downsize nine service areas and in connection therewith, recorded restructuring and other
charges totaling $9.1 million. These charges included $1.5 million to cover severance costs associated with the termination of approximately 250 employees, lease termination costs of $2.4 million, asset impairment charges for goodwill of $4.1
million and other exit costs of $1.1 million, respectively, related to the impacted service areas. The service areas selected for closure or downsizing generated net revenue of $17.7 million, operating losses of $4.0 million and negative cash flow
of $3.2 million for the fiscal year ended June 30, 2001.



The
previously mentioned charge included accrued severance, lease termination and other costs totaling $1.5 million relating to an under performing service area that we had planned to exit at the time of contract expiration in December 2001. During
fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, we reversed $0.2 million of
previously accrued lease termination costs relating to the extension period to income in fiscal 2002. In addition to this reversal, several other individually insignificant adjustments were made to the restructuring charges of prior years.



20



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A summary of activity in the restructuring reserve, which is included in accrued liabilities in the
consolidated balance sheets, is as follows (in thousands):



|                         |  |                 |        |   |                         |   |        |                                |  |   |                  |   |  |       |        |   |  |   |         |  
|------------------------ |  | --------------- | ------ | - | ----------------------- | - | ------ | ------------------------------ |  | - | ---------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                         |  | Severance Costs |        |   | Lease Termination Costs |   |        | Write-Off of Intangible Assets |  |   | Other Exit Costs |   |  | Total |       
|Balance at June 30, 2000 |  | $               | 3,529  |   |                         | $ | 3,247  |                                |  | $ |                 |   |  | $     | 1,356  |   |  | $ | 8,132   |  
|Fiscal 2001 charge       |  |                 | 1,475  |   |                         |   | 2,371  |                                |  |   | 4,092            |   |  |       | 1,153  |   |  |   | 9,091   |  
|Fiscal 2001 usage        |  |                 | (4,531 | ) |                         |   | (1,071 | )                              |  |   | (4,092           | ) |  |       | (1,360 | ) |  |   | (11,054 | )
|Adjustments              |  |                 | 1,361  |   |                         |   | (1,313 | )                              |  |   |                 |   |  |       | (48    | ) |  |   |        |  
|                         |  |                 |        |   |                         |   |        |                                |  |   |                  |   |  |       |        |   |  |   |         |  
|Balance at June 30, 2001 |  |                 | 1,834  |   |                         |   | 3,234  |                                |  |   |                 |   |  |       | 1,101  |   |  |   | 6,169   |  
|Fiscal 2002 usage        |  |                 | (1,025 | ) |                         |   | (1,172 | )                              |  |   |                 |   |  |       | (951   | ) |  |   | (3,148  | )
|Adjustments              |  |                 | (52    | ) |                         |   | (548   | )                              |  |   |                 |   |  |       | (118   | ) |  |   | (718    | )
|                         |  |                 |        |   |                         |   |        |                                |  |   |                  |   |  |       |        |   |  |   |         |  
|Balance at June 30, 2002 |  | $               | 757    |   |                         | $ | 1,514  |                                |  | $ |                 |   |  | $     | 32     |   |  | $ | 2,303   |  
|                         |  |                 |        |   |                         |   |        |                                |  |   |                  |   |  |       |        |   |  |   |         |  



Interest Expense Interest expense decreased by $5.1 million, or 16.7%, from $30.6 million for the year ended June 30, 2001 to $25.5 million for the year ended June 30, 2002. This decrease was primarily caused by lower rates on the revolving credit
facility as well as lower average debt balances.



Other
Income (Expense), Net Other income (expense), net increased $4.0 million from the year ended June 30, 2001 to the year ended June 30, 2002. Other expense in fiscal 2001 included a $4.0 million charge relating to the purchase of the
minority interest of a joint venture partner in one of our ambulance operations. A description of this transaction is included in Note 8 to our consolidated financial statements.



Income Taxes We recognized an income tax benefit of $2.5 million in 2002 compared with an income tax provision
of $1.1 million in 2001. The income tax benefit in 2002 resulted from federal income tax refunds of $0.6 million resulting from recently enacted legislation that allowed us to carry back a portion of our net operating losses to prior years as well
as refunds of $1.6 million applicable to prior years for which recognition was deferred until receipt. We did not recognize the future income tax benefits attributable to our domestic net operating losses in 2002 and 2001 as it is more likely than
not that the related benefits will not be realized.



Income
(Loss) From Discontinued Operations  Due to deteriorating economic conditions and continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America,
including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net
liabilities. Medical transportation and related service revenue related to our Latin American operations totaled $23.9 million and $41.9 million for the years ended June 30, 2002 and 2001, respectively. Fire and other revenue related to our Latin
American operations totaled $1.5 million and $1.2 million for the years ended June 30, 2002 and 2001, respectively. Our Latin American operations generated net income of $1.0 million for the year ended June 30, 2002 and a net loss of $67.4 million
for the year ended June 30, 2001. The net loss in 2001 included $46.3 million of asset impairment charges and $8.5 million of other operating expenses related to asset write-offs and reserve adjustments as a result of account reconciliations of our
various Argentine subsidiaries. Additionally, we sold our Argentine clinic operations in fiscal 2001 in exchange for a $3.0 million in non-interest bearing note receivable. The note, which required monthly principal payments of $25,000 through April
2011, was included in the disposition of our Latin American operations effective September 27, 2002. The sale resulted in a loss on disposal of $9.4 million, including the write-off of $9.3 million of related goodwill. The clinic operations
generated revenue of $4.0 million, operating losses of $1.5 million, and negative cash flow of $0.9 million during fiscal 2001.



Cumulative Effect of Change in Accounting Principle  We adopted new rules on accounting for goodwill and other intangible assets effective
July 1, 2001. Under the transitional provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we performed impairment tests on the net goodwill and other intangible assets associated
with each of our reporting units with the assistance of independent valuation experts and determined that a transitional goodwill impairment charge of $49.5 million both before and after taxes, was required. The impairment charge primarily related
to our medical transportation and related services segment. See Note 7 of our consolidated financial statements for further discussion of the effect of the adoption of this accounting principle.



21



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Liquidity and Capital Resources



During fiscal 2003, we reported net income of $9.0 million compared with net losses of $48.2 million in fiscal 2002 and
$205.3 million in 2001. Net income for the year ended June 30, 2003 included a $12.5 million gain on the disposal of our Latin American operations. The net loss in fiscal 2002 included a charge of $49.5 million relating to our adoption of SFAS 142
effective July 1, 2002. The net loss in fiscal 2001 included asset impairment, restructuring and other similar charges totaling $122.0 million. Cash provided by operating activities totaled $13.1 million in fiscal 2003, $9.6 million in 2002 and $6.7
million in fiscal 2001.



At June 30, 2003, we had cash of $12.6
million, total debt of $306.6 million and a stockholders deficit of $208.9 million. Our total debt at June 30, 2003 included $149.9 million of our 7 7/8% Senior Notes due 2008, $152.4 million outstanding under our 2002 Amended Credit Facility
due December 31, 2004, $3.7 million payable to a former joint venture partner and $0.6 million of capital lease obligations.



As discussed in Note 12 to our consolidated financial statements, we were not in compliance with certain of the covenants contained in our credit facility
at June 30, 2002. On September 30, 2002, we entered into the 2002 Amended Credit Facility with our lenders which, among other things, extended the maturity date of the facility from March 16, 2003 to December 31, 2004, waived previous
non-compliance, and required the issuance to the lenders of 211,549 shares of our Series B redeemable nonconvertible participating preferred stock.



As also discussed in Note 12 to our consolidated financial statements, we violated certain financial and reporting covenants as a result of the
restatement of our financial statements. On September 26, 2003, we entered into the 2003 Amended Credit Facility with our lenders which, among other things, extended the maturity date of the facility from December 31, 2004 to December 31, 2006,
waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of our Series C redeemable nonconvertible participating preferred stock.



Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in
our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which is subject to, among other things, our future operating performance as
well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.



If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term
business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash balances
will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through June 30, 2004. To the extent that actual results or events differ from our financial projections or
business plans, our liquidity may be adversely impacted.



Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, the issuance of Senior Notes, the sale of common stock through
an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options.



During the year ended June 30, 2003, cash flow provided by operating activities was $13.1 million and resulted primarily from net income of $9.0 million,
the provision for doubtful accounts of $85.0 million and non-cash depreciation and amortization expense of $13.3 million offset by an increase in accounts receivable of $81.6 million, and a non-cash gain on the disposition of our Latin American
operations of $13.7 million. Cash flow provided by operating activities was $9.6 million for the year ended June 30, 2002.



Cash used in investing activities was $7.6 million for the year ended June 30, 2003 due primarily to capital expenditures of $9.4 million offset by
proceeds from the sale of property and equipment of $1.8 million. Cash used in investing activities was $5.8 million for the year ended June 30, 2002, due to capital expenditures of $6.9 million offset by proceeds from the sale of property and
equipment of $1.0 million.



22



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Cash used in financing activities was $3.7 million for the year ended June 30, 2003, primarily due to
repayments of debt and capital lease obligations and cash paid for debt issuance costs. Cash used in financing activities was $3.2 million for the year ended June 30, 2002.



Accounts receivable, net of the allowance for doubtful accounts, was $60.4 million and $64.5 million as of June 30, 2003 and
2002, respectively with the decrease in net accounts receivable is primarily due to improved billing and collections processes.



The allowance for doubtful accounts increased from approximately $38.0 million at June 30, 2002 to approximately $48.4 million at June 30, 2003. The
primary reason for this increase is the current period provision for doubtful accounts offset by the write-off of uncollectible receivables. The increase is also reflective of the mix of receivables outstanding at the end of the period. We have
instituted several initiatives to improve our collection procedures. While management believes that we have a predictable method of determining the realizable value of our accounts receivable, based on continuing difficulties in the healthcare
reimbursement environment, there can be no assurance that there will not be additional future write-offs.



We had working capital of $2.6 million at June 30, 2003, including cash of $12.6 million compared to a working capital deficiency of $10.7 million,
including cash of $10.7 million at June 30, 2002. The improvement in working capital is primarily due to the $16.0 million decrease in accrued liabilities which is related to a decrease in accrued interest due to the conversion of accrued interest
to amounts outstanding under our credit facility as a result of the September 30, 2002 amendment described below as well as assumption of $6.0 million of liabilities by the buyer of our Latin American operations.



In March 1998, we entered into a $200 million revolving credit facility that
was originally scheduled to mature on March 16, 2003. The credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly-owned current and future subsidiaries. Interest rates
and availability under the credit facility depended on us meeting certain financial covenants.



In December 1999, we were not in compliance with certain of the covenants contained in the original credit facility. We received a series of compliance waivers regarding these covenants through April 1, 2002. The
waivers precluded additional borrowings under the credit facility, required us to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required us to make unscheduled principal
payments totaling $5.2 million.



Effective September 30, 2002,
we entered into an amended credit facility with our lenders pursuant to which, among other things, prior identified covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate
was increased to LIBOR + 7%, and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million (the
2002 Amended Credit Facility). Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with our business levels and outlook at that time. In consideration for the amendment,
we paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of our Series B redeemable nonconvertible participating preferred stock. The Series B shares are not convertible by the holder but we may elect to settle the
Series B shares by issuance of common shares equivalent to 10% of the common shares outstanding at the date of the amendment on a fully diluted basis, as defined in the related agreement. Conversion of the Series B shares occurs upon notice from us;
however, because a sufficient number of common shares are not currently available to permit conversion, we intend to seek stockholder approval to amend our certificate of incorporation to authorize additional common shares.



The 2002 Amended Credit Facility was not considered to represent a
significant modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being
amortized over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are
included in other assets in the consolidated balance sheet, totalled $3.6 million at June 30, 2003.



As a result of the previously mentioned restatement of our consolidated financial statements and the related increase in our stockholders deficit,
we were not in compliance with the minimum tangible net worth covenant



23



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contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of our Form 10-Q for the quarter ended
March 31, 2003, thereby causing us to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants
triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.



We entered into an amended credit facility, dated September 26, 2003, with
our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 2002 amendment were
revised to levels consistent with our current business levels and outlook (the 2003 Amended Credit Facility). The revised financial covenants include: total debt leverage ratio (initially set at 6.88); minimum tangible net worth
(initially set at $280.0 million deficit); fixed charge coverage ratio (initially set at 1.10); a limitation on annual capital expenditures (initially set at $11.0 million per fiscal year); and, a limitation on annual operating lease expense
equivalent to 3.10% of consolidated net revenue. The compliance levels for the first four covenants outlined above are set at varying levels as specified in the related agreement. The interest rate applicable to borrowings under the credit facility
remained unchanged at LIBOR +7%.



In consideration for the
amendment, we paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 shares of our Series C redeemable nonconvertible participating preferred stock. The Series C shares are not convertible by the
holder but we may elect to settle the Series C shares by issuance of common shares equivalent to 11% of the common shares outstanding on a fully diluted basis, as defined in the related agreement. Conversion of the Series C shares occurs upon notice
from us; however, because a sufficient number of common shares are not currently available to permit conversion, we intend to seek stockholder approval to amend our certificate of incorporation to authorize additional common shares. We also made a
$1.0 million principal payment related to asset sale proceeds as required under the September 30, 2002 amendment to the credit facility.



The 2003 Amended Credit Facility is not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million
amendment fee and the estimated fair value of the Series C shares will be capitalized as debt issue costs and amortized to interest expense over the term of the amended agreement. Professional fees and other related costs incurred in connection with
the amendment will be expensed.



At June 30, 2003, the weighted
average interest rate on credit facility borrowings was approximately 8.4%. At June 30, 2003, there was $152.4 million outstanding on the credit facility as well as $3.5 million in letters of credit issued under the credit facility.



In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008 (the
Senior Notes) under Rule 144A under the Securities Act of 1933, as amended (Securities Act). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. We incurred expenses related to the offering of approximately $5.3
million and are amortizing such costs over the term of the Senior Notes. In April 1998, we filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration became effective on May 14, 1998.
The Senior Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. The Senior Notes contain certain
covenants that, among other items, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.



As noted above, we have amended our credit facility effective September 30, 2003 through December 31, 2006. If we fail to remain in compliance with
financial and other covenants set forth in the agreement, we will be in default under our revolving credit facility or the agreement for the Senior Notes or both. A default under the Senior Notes or our revolving credit facility may, among other
things, cause all amounts owed by us under such facilities to become due immediately upon such default. Any inability to resolve a violation through waivers or other means could have a material adverse effect on our business, financial condition,
results of operations and cash flows.



There can be no
assurance that we will not incur significant unanticipated liabilities. Similarly, there can be no assurance that we will be able to obtain additional debt or equity financing on terms satisfactory to us, or at all, should cash flow from operations
and our existing cash resources prove to be inadequate. As discussed above, although we have negotiated an amendment and extension of our credit facility, we will not have access to additional



24



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borrowings under such facility. If we are required to seek additional financing, any such arrangement may involve material and substantial dilution to
existing stockholders resulting from, among other things, issuance of equity securities or the conversion of all or a portion of our existing debt to equity. In such event, the percentage ownership of our current stockholders will be materially
reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. If we require additional financing but are unable to obtain it, our business, financial condition, results of operations and
cash flows may be materially adversely affected.



Insurance Programs



Many of our operational contracts as well as laws in
certain of the areas where we operate, require that we carry specified amounts of insurance coverage. Additionally, in the ordinary course of our business, we are subject to accident, injury and professional liability claims as a result of the
nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize our risk of exposure, and to comply with such legal and contractual requirements, we carry a broad range of insurance policies, including comprehensive
general liability, automobile, property damage, professional, workers compensation, and other lines of coverage. We typically renew each of these policies annually and purchase limits of coverage at levels we believe are appropriate, taking
into account historical and projected claim trends, reasonable protection of our assets and operations, and the economic conditions in the insurance market. Depending upon the specific line of coverage, the total limits of insurance maintained by us
may be achieved through a combination of primary policies, excess policies and self-insurance. See Risk Factors  Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.



We retain certain levels of exposure with respect to our general liability
and workers compensation programs and purchase coverage from third party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, we establish reserves for claims, both reported
and incurred but not reported, within our level of retention based on currently available information as well as our historical claims experience. See Risk Factors  Our reserves may prove inadequate.



We engage third-party administrators, or TPAs, to manage claims resulting
from our general liability and workers compensation programs. The TPAs establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be
appropriate. We periodically review the claim reserves established by the TPAs and engage independent actuaries to assist with the evaluation of the adequacy of our reserves on an annual basis. We adjust our claim reserves with an associated charge
or credit to expense as new information on the underlying claims is obtained.



Since fiscal year 2000, we have experienced a substantial rise in the costs associated with our insurance program, including total premium costs, fees for TPAs to process claims, brokerage costs, risk management
expenses and costs related to assurances that we can satisfy our retention obligations. These increases have primarily resulted from the overall hardening of the insurance markets, our historical claim trends, and the general increase in costs of
claims and related litigation. See Risk Factors  We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.



General Liability: We have historically maintained insurance policies
for comprehensive general liability, automobile liability and professional liability. Throughout this report, these three types of policies are referred to collectively as the general liability policies. These policies are typically
renewed annually. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled
$13.9 million, $15.4 million, and $19.7 million at June 30, 2003, 2002 and 2001, respectively. See Risk Factors  Our reserves may prove inadequate.



25



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A summary of activity in our general liability claim reserves, which are included in accrued liabilities
in the consolidated balance sheet, is as follows:



|                                             |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | June 30,       |       
|                                             |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                             |  | (in thousands) |       
|Balance at beginning of year                 |  | $              | 15,433 |   |      | $ | 19,715 |      |  | $ | 3,171  |  
|Provision charged to other operating expense |  |                | 4,506  |   |      |   | 2,442  |      |  |   | 22,326 |  
|Claim payments charged against the reserve   |  |                | (6,004 | ) |      |   | (6,724 | )    |  |   | (5,782 | )
|                                             |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                       |  | $              | 13,935 |   |      | $ | 15,433 |      |  | $ | 19,715 |  
|                                             |  |                |        |   |      |   |        |      |  |   |        |  



We performed a
comprehensive review of information related to our historical settlement information and open claims during the third quarter of fiscal 2001. As a result of this review, we recorded a charge of $15.0 million for increases in our reserves for
reported claims as well as to establish reserves for claims incurred but not reported.



Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Cash deposits relating to our general liability program totaled $2.9 million at June
30, 2003 of which $1.8 million is included in prepaid expenses and other and $1.1 million is included in insurance deposits. Cash deposits totaled $1.9 million at June 30, 2002 which is included in insurance deposits.



Our general liability policies corresponding with fiscal years 2001 and 2002
were issued by Legion Insurance Company (Legion). Legions obligations under such policies were reinsured by an unrelated insurance carrier that was identified and approved by us. At the time the coverage was purchased, Legion was
an A rated insurance carrier while the reinsurer was an A++ rated carrier. Under these policies, Legions obligation (as well as that of its reinsurer) to pay covered losses commences once we satisfy our aggregate retention limits
for the respective policy years. As of June 30, 2003, we have met our aggregate retention limit with respect to the policies corresponding to fiscal 2001 and anticipate that we will meet our aggregate retention limit for the policies corresponding
to fiscal 2002. Pursuant to these policies, Legion (and its reinsurer) is obligated to fund all claim-related payments in excess of our retention limits.



On July 25, 2003, the Pennsylvania Insurance Department (the Department) placed Legion into liquidation. The Department is conducting the
liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the Court). Legions liquidation could put our general liability insurance coverage for the previously mentioned policy years at risk;
however, based upon information currently available, we believe that proceeds from Legions reinsurer will be directly available to pay claims in excess of our retention limits, notwithstanding the liquidation process. If the Court deems our
reinsurance to be a general asset of Legion or if the reinsurer otherwise refuses to pay claims directly, then reinsurance proceeds to fund covered general liability losses in excess of our retention limits may be substantially reduced, delayed or
unrecoverable. In such an event, we may be required to fund general liability losses applicable to these policy years in excess of our retention limits, to the extent that such losses are not covered by the applicable state guaranty funds. Our
inability to timely obtain reinsurance or state guaranty fund coverage for general liability claims could have a material adverse effect on our business, financial condition, results of operations and cash flows. See Risk Factors  Two
insurance companies with which we have previously done business are in financial distress.



Workers Compensation:We have historically maintained insurance policies for workers compensation and employers liability. We are required by
law and by most of our operational contracts to maintain minimum statutory limits of workers compensation insurance. These policies are typically renewed annually. If the ultimate development of these claims is significantly different than has been
estimated, the reserves for workers compensation claims could be overstated or understated. Reserves related to workers compensation claims totaled $11.3 million, $15.9 million and $14.9 million at June 30, 2003, 2002 and 2001,
respectively. See Risk Factors  Our reserves may prove inadequate.



26



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A summary of activity in our workers compensation claim reserves, which are also included in
accrued liabilities in the consolidated balance sheet, is as follows:



|                                                   |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | June 30,       |       
|                                                   |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                                   |  | (in thousands) |       
|Balance at beginning of year                       |  | $              | 15,924 |   |      | $ | 14,944 |      |  | $ | 11,315 |  
|Provision charged to payroll and employee benefits |  |                |       |   |      |   | 7,318  |      |  |   | 11,832 |  
|Claim payments charged against the claim reserve   |  |                | (4,669 | ) |      |   | (6,338 | )    |  |   | (8,203 | )
|                                                   |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                             |  | $              | 11,255 |   |      | $ | 15,924 |      |  | $ | 14,944 |  
|                                                   |  |                |        |   |      |   |        |      |  |   |        |  



Effective May 1, 2002,
we began fully insuring our workers compensation coverage and no longer retain any of the related obligations. We are, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a result of this
change in coverage, we no longer establish reserves for claims incurred subsequent to May 1, 2002.



In connection with our restructuring activities, an increase in the volume of workers compensation claims was noted. Provisions charged to expense
during fiscal 2002 included $2.0 million recorded in the fourth quarter to increase our claim reserves based on a review of claims experience. Provisions charged to expense during fiscal 2001 included $5.0 million in the third quarter for increases
in reserves for unreported claims based on updated information received from our TPA.



Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Additionally, we have also been required to provide other forms of financial
assurance including letters of credit and surety bonds. Cash deposits relating to our workers compensation program totaled $6.8 million at June 30, 2003 which is included in insurance deposits. Cash deposits totaled $9.2 million at June 30, 2002 of
which $2.9 million is included in prepaid expenses and other and $6.3 million is included in insurance deposits.



During fiscal years 1992 through 2001, we purchased certain portions of our workers compensation coverage from Reliance Insurance Company
(Reliance). At the time we purchased such coverage, Reliance was an A rated insurance company. In connection with this coverage, we provided Reliance with various amounts and forms of collateral to secure our performance under the
respective policies as was customary at the time. As of June 30, 2003, we had $3.0 million of cash on deposit with Reliance which is included in insurance deposits. We also have provided Reliance with letters of credit and surety bonds totaling $6.4
million.



On October 3, 2003, the Department
placed Reliance into liquidation. It is our understanding that cash on deposit with Reliance will be returned to us on or before the date that all related claims have been satisfied, so long as we have met our claim payment obligations within our
retention limits under the related policies. Based on the information currently available, we believe that the cash on deposit with Reliance is fully recoverable and will either be returned to us or used by the liquidator, with our prior consent, to
pay claims on our behalf. In the event that we are unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliances liquidation could put
our workers compensation insurance coverage at risk for the related policy years; however, based upon information currently available, we believe that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent
that such losses are not covered by either Reliance or the applicable state guaranty funds, we may be required to fund the related workers compensation claims for the applicable policy years. Our inability to access the funds on deposit with
Reliance or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See Risk Factors  Two insurance companies with which we have previously done
business are in financial distress.



During fiscal 2002,
we purchased certain portions of our workers compensation coverage from Legion. Legion required assurances that we would be able to fund our related retention obligations, which were estimated by Legion to approximate $6.2 million. We provided this
assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual Indemnity), a Legion affiliate. That policy required us to deposit



27



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approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy the our retention obligations under the
Legion policy. We funded these deposits on a monthly basis during the policy term. As of June 30, 2003, we had net deposits with respect to this coverage totaling $3.3 million which are included in insurance deposits.



As mentioned previously, the Department placed Legion into liquidation on
July 25, 2003. In January 2003, the Court ordered the Legion rehabilitator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as us. It is
our understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. We are actively participating in
the Court proceedings to cause such a trust account or other mechanism to be created and to operate so as to fully cover all our deductible obligations as originally intended and to return to us any remaining deposit balance once all related claims
have been closed. Based on the information currently available, we believe that the amounts on deposit with Mutual Indemnity are fully recoverable and will either be returned to us or used to pay claims on our behalf. In the event that we are unable
to access the funds on deposit with Mutual Indemnity, we may be required to fund the related workers compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. Our
inability to access the funds on deposit with Mutual Indemnity or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See Risk Factors  Two
insurance companies with which we have previously done business are in financial distress.



Indemnifications



We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify the other
parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other party against losses due to property damage including environmental
contamination, personal injury, failure to comply with applicable laws, our negligence or willful misconduct, or breach of representations and warranties and covenants.



Additionally, some of our agreements with customers require us to provide certain assurances related to the performance of
our services. Such assurances, from time to time, obligate us to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of
material defaults or other certain circumstances, or (iii) provide surety bonds or letter of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default. With respect to such surety
bonds, we are also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.



We provide for indemnification of directors, officers and other persons in accordance with contracts, limited liability agreements, certificates of
incorporation, by-laws, articles of association or similar organizational documents, as the case may be. We maintain directors and officers insurance which may enable us to recover a portion of any future amounts paid.



In addition to the above, from time to time we provide standard
representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provide indemnities that protect the counterparties to these contracts in the event they
suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by us.



While our future obligations under certain agreements may contain limitations on liability for indemnification, other
agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in
each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, and cash flows or results of operations. Additionally, we do not believe that any
amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, cash flows or results of operations.



28



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Nasdaq Listing



On May 22, 2003, the Nasdaq Stock Market (Nasdaq) notified us that we were not in compliance with a Nasdaq SmallCap Market
maintenance standard. This standard requires that we file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.



The notification followed our announcement on May 14, 2003 that we would
delay filing our Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate our consolidated financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for
doubtful accounts recorded in prior years. We announced that we would file the applicable form 10-Q upon finalization of the related restatement adjustments.



We subsequently submitted our request for a Nasdaq Listing Qualifications Panel (the Panel) hearing to consider our continued listing. The
hearing was held June 19, 2003, where we presented our basis for a temporary exception to the filing requirement in order to complete our related analysis.



On July 17, 2003, Nasdaq informed us that the Panel had made a determination. In its decision to grant an exception, the Panel determined that our
securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing our Form 10-Q for the third quarter ended March 31, 2003 and our Form 10-K for the fiscal year ended June 30, 2003.



In addition to granting the filing exception through September
30, 2003, the Panel specifically required us to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should we miss a filing deadline in accordance with
the exception, we will not be entitled to a new hearing on the matter and our securities may be delisted from The Nasdaq SmallCap Market. In the event we fail to comply with any continued listing requirement during the exception period, we will be
provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panels decision as to whether continued listing is appropriate.



The Panel reserves the right to terminate or modify the terms of this
exception upon a review of the Companys reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There can be no assurance we will evidence compliance with the requirements as set forth by Nasdaq
or that we will return to continued listing on The Nasdaq SmallCap Market.



On September 29, 2003, we issued a press release indicating that the filing of our Form 10-K for fiscal 2003 would be delayed. We also filed a Form 12b-25 request with the SEC for an extension to file our Form 10-K on
or before October 14, 2003. Due to such delayed filing, we formally requested, on September 30, 2003, that the Panel permit us to comply with their July 17, 2003 decision by filing both our Form 10-K for fiscal 2003 and our Form 10-Q for the period
ended March 31, 2003 on or before October 14, 2003. On October 7, 2003 the Panel informed us that our requested modification to their July 17, 2003 decision was granted.



Quarterly Results



The following table summarizes our unaudited quarterly operating results for each quarter of fiscal 2003 and 2002. Net revenue and operating income
included in the table relate to our continuing operations and exclude amounts applicable to our Latin American operations that were disposed of in September 2002. Such unaudited quarterly operating information has been restated, as applicable, to
reflect adjustments relating to provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts; the adoption of FIN 46 and the related consolidation on a retroactive basis our investment in San Diego
Medical Services Enterprise LLC; to expense professional fees relating to the September 30, 2002 amendment to our credit facility that were previously capitalized and being amortized over the amended term of the facility; and to apply the two-class
method of computing basic and diluted earnings per share subsequent to the issuance of our Series B redeemable nonconvertible participating preferred stock on September 30, 2002.



29



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|                                                                                                    |  |                                       |         |   |                    |   |         |                   |  |   |                    |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------ | - | ------- | ----------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                                                                    |  | 2003                                  |        
|                                                                                                    |  | First Quarter (1)                     |         |   | Second Quarter (1) |   |         | Third Quarter (1) |  |   | Fourth Quarter (1) |  
|                                                                                                    |  | (in thousands, except per share data) |        
|Net revenue                                                                                         |  | $                                     | 130,178 |   |                    | $ | 128,866 |                   |  | $ | 130,064            |   |  | $ | 131,369 |  
|Operating income(2)                                                                                 |  |                                       | 7,238   |   |                    |   | 7,714   |                   |  |   | 8,370              |   |  |   | 2,685   |  
|Income (loss) from continuing operations                                                            |  |                                       | 421     |   |                    |   | (252    | )                 |  |   | 535                |   |  |   | (4,070  | )
|Net income (loss)(3)                                                                                |  |                                       | 12,753  |   |                    |   | (252    | )                 |  |   | 535                |   |  |   | (4,070  | )
|Basic income (loss) from continuing operations applicable to common stock per share                 |  | $                                     | 0.03    |   |                    | $ | (0.09   | )                 |  | $ | (0.05              | ) |  | $ | (0.30   | )
|Basic income (loss) per share                                                                       |  | $                                     | 0.80    |   |                    | $ | (0.09   | )                 |  | $ | (0.05              | ) |  | $ | (0.30   | )
|Diluted income (loss) from continuing operations applicable to common stock per share               |  | $                                     | 0.03    |   |                    | $ | (0.09   | )                 |  | $ | (0.05              | ) |  | $ | (0.30   | )
|Diluted income (loss) per share                                                                     |  | $                                     | 0.72    |   |                    | $ | (0.09   | )                 |  | $ | (0.05              | ) |  | $ | (0.30   | )
|                                                                                                    | 
|                                                                                                    |  | 2002                                  |        
|                                                                                                    |  | First Quarter(1)                      |         |   | Second Quarter(1)  |   |         | Third Quarter(1)  |  |   | Fourth Quarter(1)  |  
|                                                                                                    |  | (in thousands, except per share data) |        
|Net revenue                                                                                         |  | $                                     | 120,390 |   |                    | $ | 118,661 |                   |  | $ | 124,818            |   |  | $ | 125,111 |  
|Operating income(4)                                                                                 |  |                                       | 5,337   |   |                    |   | 5,554   |                   |  |   | 9,787              |   |  |   | 2,732   |  
|Income (loss) from continuing operations before cumulative effect of change in accounting principle |  |                                       | (1,849  | ) |                    |   | 1,250   |                   |  |   | 3,485              |   |  |   | (2,516  | )
|Net income (loss)(5) (6)                                                                            |  |                                       | (51,565 | ) |                    |   | 2,911   |                   |  |   | 3,356              |   |  |   | (2,866  | )
|Basic income (loss) from continuing operations per share                                            |  | $                                     | (0.12   | ) |                    | $ | 0.08    |                   |  | $ | 0.23               |   |  | $ | (0.16   | )
|Basic income (loss) per share                                                                       |  | $                                     | (3.43   | ) |                    | $ | 0.19    |                   |  | $ | 0.22               |   |  | $ | (0.18   | )
|Diluted income (loss) from continuing operations per share                                          |  | $                                     | (0.12   | ) |                    | $ | 0.08    |                   |  | $ | 0.22               |   |  | $ | (0.16   | )
|Diluted income (loss) per share                                                                     |  | $                                     | (3.43   | ) |                    | $ | 0.19    |                   |  | $ | 0.21               |   |  | $ | (0.18   | )

---

|(1) | We have restated our consolidated financial statements for the following:
|--- | -------------------------------------------------------------------------



Accounts Receivable: We determined that collections on accounts receivable relating to medical transportation revenue, primarily
revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior
years were inadequate. The inadequacy of such provisions caused our period-end allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable overstated. We determined that this situation was primarily
attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.



We determined that our consolidated financial statements of prior years required restatement
as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers is reflected as a reduction of net revenue while the portion relating to uncollectible
accounts is reflected as an adjustment to the provision for doubtful accounts.



30



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Professional Fees:We determined that professional fees incurred in the first quarter of fiscal 2003 in connection
with the September 2002 modification to our credit facility should have been expensed rather than amortized over the term of the facility. Accordingly, the results for the first two quarters of fiscal 2003 have been restated for this matter.



San Diego Medical Services Enterprise LLC: During the fourth quarter of
fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires that variable interest entities or VIEs be
consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San
Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While
consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.



Earnings Per Share: As described in Note 2 to our consolidated financial statements,
we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B redeemable nonconvertible
participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date, (subject to approval by our shareholders of an increase in the number of authorized
common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are
allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.



31



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A summary of our unaudited quarterly operating results impacted by the restatement adjustments, accounting change and
discontinued operations reclassifications is as follows:



|                                                                               |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|------------------------------------------------------------------------------ |  | ---------------------- | -------- | ----------------------- | - | ----------- |  | --------------------- | ------- | ------------------------------ | - | ----------- |  | - | -------- |  | - | ----- |  | - | ------- |  | - | -------- | 
|                                                                               |  | As Previously Reported |          | Restatement Adjustments |   | As Restated |  | Accounting Change (D) |         | Less Latin American Operations |   | As Reported | 
|                                                                               |  | A                      |          | B                       |   | C           |  |                       |         |                               
|Quarter ended September 30, 2002:                                              |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 125,565  |                         | $ | (1,174)     |  | $                     |        |                                | $ |            |  | $ | 124,391  |  | $ | 5,787 |  | $ |        |  | $ | 130,178  | 
|Operating income                                                               |  |                        | 9,754    |                         |   | (1,789)     |  |                       | (1,603) |                                |   |            |  |   | 6,362    |  |   | 876   |  |   |        |  |   | 7,238    | 
|Income from continuing operations                                              |  |                        | 3,813    |                         |   | (1,789)     |  |                       | (1,603) |                                |   |            |  |   | 421      |  |   |      |  |   |        |  |   | 421      | 
|Net income                                                                     |  |                        | 16,145   |                         |   | (1,789)     |  |                       | (1,603) |                                |   |            |  |   | 12,753   |  |   |      |  |   |        |  |   | 12,753   | 
|Basic income from continuing operations applicable to common stock per share   |  | $                      | 0.24     |                         | $ | (0.11)      |  | $                     | (0.10)  |                                | $ |            |  | $ | 0.03     |  | $ |      |  | $ |        |  | $ | 0.03     | 
|Basic income per share                                                         |  | $                      | 1.01     |                         | $ | (0.11)      |  | $                     | (0.10)  |                                | $ |            |  | $ | 0.80     |  | $ |      |  | $ |        |  | $ | 0.80     | 
|Diluted income from continuing operations applicable to common stock per share |  | $                      | 0.21     |                         | $ | (0.09)      |  | $                     | (0.09)  |                                | $ |            |  | $ | 0.03     |  | $ |      |  | $ |        |  | $ | 0.03     | 
|Diluted income per share                                                       |  | $                      | 0.91     |                         | $ | (0.10)      |  | $                     | (0.09)  |                                | $ |            |  | $ | 0.72     |  | $ |      |  | $ |        |  | $ | 0.72     | 
|Quarter ended December 31, 2002:                                               |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 123,464  |                         | $ | (379)       |  | $                     |        |                                | $ |            |  | $ | 123,085  |  | $ | 5,781 |  | $ |        |  | $ | 128,866  | 
|Operating income                                                               |  |                        | 7,694    |                         |   | (578)       |  |                       |        |                                |   |            |  |   | 7,116    |  |   | 598   |  |   |        |  |   | 7,714    | 
|Income (loss) from continuing operations                                       |  |                        | 148      |                         |   | (578)       |  |                       | 178     |                                |   |            |  |   | (252)    |  |   |      |  |   |        |  |   | (252)    | 
|Net income (loss)                                                              |  |                        | 148      |                         |   | (578)       |  |                       | 178     |                                |   |            |  |   | (252)    |  |   |      |  |   |        |  |   | (252)    | 
|Basic loss from continuing operations applicable to common stock per share     |  | $                      | (0.07)   |                         | $ | (0.03)      |  | $                     | 0.01    |                                | $ |            |  | $ | (0.09)   |  | $ |      |  | $ |        |  | $ | (0.09)   | 
|Basic loss per share                                                           |  | $                      | (0.07)   |                         | $ | (0.03)      |  | $                     | 0.01    |                                | $ |            |  | $ | (0.09)   |  | $ |      |  | $ |        |  | $ | (0.09)   | 
|Diluted loss from continuing operations applicable to common stock per share   |  | $                      | (0.07)   |                         | $ | (0.03)      |  | $                     | 0.01    |                                | $ |            |  | $ | (0.09)   |  | $ |      |  | $ |        |  | $ | (0.09)   | 
|Diluted loss per share                                                         |  | $                      | (0.07)   |                         | $ | (0.03)      |  | $                     | 0.01    |                                | $ |            |  | $ | (0.09)   |  | $ |      |  | $ |        |  | $ | (0.09)   | 
|Quarter ended March 31, 2003:                                                  |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Income from continuing operations                                              |  | $                      | 535      |                         |   |            |  |                       |        |                                |   |            |  | $ | 535      |  |   |      |  |   |        |  | $ | 535      | 
|Net income                                                                     |  |                        | 535      |                         |   |            |  |                       |        |                                |   |            |  |   | 535      |  |   |      |  |   |        |  |   | 535      | 
|Basic loss from continuing operations applicable to common stock per share     |  | $                      | (0.04)   |                         |   |            |  |                       |        |                                | $ | (0.01)      |  | $ | (0.05)   |  |   |      |  |   |        |  | $ | (0.05)   | 
|Basic loss per share                                                           |  | $                      | (0.04)   |                         |   |            |  |                       |        |                                | $ | (0.01)      |  | $ | (0.05)   |  |   |      |  |   |        |  | $ | (0.05)   | 
|Diluted loss from continuing operations applicable to common stock per share   |  | $                      | (0.04)   |                         |   |            |  |                       |        |                                | $ | (0.01)      |  | $ | (0.05)   |  |   |      |  |   |        |  | $ | (0.05)   | 
|Diluted loss per share                                                         |  | $                      | (0.04)   |                         |   |            |  |                       |        |                                | $ | (0.01)      |  | $ | (0.05)   |  |   |      |  |   |        |  | $ | (0.05)   | 
|Quarter ended June 30, 2003:                                                   |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Loss from continuing operations                                                |  | $                      | (4,070)  |                         |   |            |  |                       |        |                                |   |            |  | $ | (4,070)  |  |   |      |  |   |        |  | $ | (4,070)  | 
|Net loss                                                                       |  |                        | (4,070)  |                         |   |            |  |                       |        |                                |   |            |  |   | (4,070)  |  |   |      |  |   |        |  |   | (4,070)  | 
|Basic loss from continuing operations applicable to common stock per share     |  | $                      | (0.33)   |                         |   |            |  |                       |        |                                | $ | 0.03        |  | $ | (0.30)   |  |   |      |  |   |        |  | $ | (0.30)   | 
|Basic loss per share                                                           |  | $                      | (0.33)   |                         |   |            |  |                       |        |                                | $ | 0.03        |  | $ | (0.30)   |  |   |      |  |   |        |  | $ | (0.30)   | 
|Diluted loss from continuing operations applicable to common stock per share   |  | $                      | (0.33)   |                         |   |            |  |                       |        |                                | $ | 0.03        |  | $ | (0.30)   |  |   |      |  |   |        |  | $ | (0.30)   | 
|Diluted loss per share                                                         |  | $                      | (0.33)   |                         |   |            |  |                       |        |                                | $ | 0.03        |  | $ | (0.30)   |  |   |      |  |   |        |  | $ | (0.30)   | 
|Quarter ended September 30, 2001:                                              |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 116,474  |                         | $ | (564)       |  | $                     |        |                                | $ |            |  | $ | 115,910  |  | $ | 4,480 |  | $ |        |  | $ | 120,390  | 
|Operating loss                                                                 |  |                        | 5,853    |                         |   | (860)       |  |                       |        |                                |   |            |  |   | 4,993    |  |   | 344   |  |   |        |  |   | 5,337    | 
|Loss from continuing operations                                                |  |                        | (989)    |                         |   | (860)       |  |                       |        |                                |   |            |  |   | (1,849)  |  |   |      |  |   |        |  |   | (1,849)  | 
|Net loss                                                                       |  |                        | (50,705) |                         |   | (860)       |  |                       |        |                                |   |            |  |   | (51,565) |  |   |      |  |   |        |  |   | (51,565) | 
|Basic loss from continuing operations applicable to common stock per share     |  | $                      | (0.06)   |                         | $ | (0.06)      |  | $                     |        |                                | $ |            |  | $ | (0.12)   |  | $ |      |  | $ |        |  | $ | (0.12)   | 
|Basic loss per share                                                           |  | $                      | (3.37)   |                         | $ | (0.06)      |  | $                     |        |                                | $ |            |  | $ | (3.43)   |  | $ |      |  | $ |        |  | $ | (3.43)   | 
|Diluted loss from continuing operations applicable to common stock per share   |  | $                      | (0.06)   |                         | $ | (0.06)      |  | $                     |        |                                | $ |            |  | $ | (0.12)   |  | $ |      |  | $ |        |  | $ | (0.12)   | 
|Diluted loss per share before                                                  |  | $                      | (3.37)   |                         | $ | (0.06)      |  | $                     |        |                                | $ |            |  | $ | (3.43)   |  | $ |      |  | $ |        |  | $ | (3.43)   | 
|Quarter ended December 31, 2001:                                               |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 114,333  |                         | $ | (170)       |  | $                     |        |                                | $ |            |  | $ | 114,163  |  | $ | 4,498 |  | $ |        |  | $ | 118,661  | 
|Operating income                                                               |  |                        | 5,526    |                         |   | (259)       |  |                       |        |                                |   |            |  |   | 5,267    |  |   | 287   |  |   |         |  |   | 5,554    | 
|Income from continuing operations                                              |  |                        | 1,509    |                         |   | (259)       |  |                       |        |                                |   |            |  |   | 1,250    |  |   |      |  |   |        |  |   | 1,250    | 
|Net income                                                                     |  |                        | 3,170    |                         |   | (259)       |  |                       |        |                                |   |            |  |   | 2,911    |  |   |      |  |   |        |  |   | 2,911    | 
|Basic income from continuing operations applicable to common stock per share   |  | $                      | 0.10     |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | 0.08     |  | $ |      |  | $ |        |  | $ | 0.08     | 
|Basic income per share                                                         |  | $                      | 0.21     |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | 0.19     |  | $ |      |  | $ |        |  | $ | 0.19     | 
|Diluted income from continuing operations applicable to common stock per share |  | $                      | 0.10     |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | 0.08     |  | $ |      |  | $ |        |  | $ | 0.08     | 
|Diluted income per share                                                       |  | $                      | 0.21     |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | 0.19     |  | $ |      |  | $ |        |  | $ | 0.19     | 
|Quarter ended March 31, 2002:                                                  |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 124,661  |                         | $ | (663)       |  | $                     |        |                                | $ |            |  | $ | 123,998  |  | $ | 4,973 |  | $ | (4,153) |  | $ | 124,818  | 
|Operating income                                                               |  |                        | 10,837   |                         |   | (1,008)     |  |                       |        |                                |   |            |  |   | 9,829    |  |   | 223   |  |   | (265)   |  |   | 9,787    | 
|Income from continuing operations                                              |  |                        | 4,363    |                         |   | (1,008)     |  |                       |        |                                |   |            |  |   | 3,355    |  |   |      |  |   | 130     |  |   | 3,485    | 
|Net income                                                                     |  |                        | 4,364    |                         |   | (1,008)     |  |                       |        |                                |   |            |  |   | 3,356    |  |   |      |  |   |        |  |   | 3,356    | 
|Basic income from continuing operations applicable to common stock per share   |  | $                      | 0.29     |                         | $ | (0.07)      |  | $                     |        |                                | $ |            |  | $ | 0.22     |  | $ |      |  | $ | 0.01    |  | $ | 0.23     | 
|Basic income per share                                                         |  | $                      | 0.29     |                         | $ | (0.07)      |  | $                     |        |                                | $ |            |  | $ | 0.22     |  | $ |      |  | $ |        |  | $ | 0.22     | 
|Diluted income from continuing operations applicable to common stock per share |  | $                      | 0.28     |                         | $ | (0.07)      |  | $                     |        |                                | $ |            |  | $ | 0.21     |  | $ |      |  | $ | 0.01    |  | $ | 0.22     | 
|Diluted income per share                                                       |  | $                      | 0.28     |                         | $ | (0.07)      |  | $                     |        |                                | $ |            |  | $ | 0.21     |  | $ |      |  | $ |        |  | $ | 0.21     | 
|Quarter ended June 30, 2002:                                                   |  |                        |          |                         |   |             |  |                       |         |                                |   |             |  |   |          |  |   |       |  |   |         |  |   |          | 
|Net revenue                                                                    |  | $                      | 122,951  |                         | $ | (272)       |  | $                     |        |                                | $ |            |  | $ | 122,679  |  | $ | 5,054 |  | $ | (2,622) |  | $ | 125,111  | 
|Operating income                                                               |  |                        | 3,052    |                         |   | (413)       |  | $                     |        |                                | $ |            |  |   | 2,639    |  |   | (122) |  |   | 215     |  |   | 2,732    | 
|Loss from continuing operations                                                |  |                        | (2,452)  |                         |   | (413)       |  |                       |        |                                |   |            |  |   | (2,865)  |  |   |      |  |   | 349     |  |   | (2,516)  | 
|Net loss                                                                       |  |                        | (2,453)  |                         |   | (413)       |  |                       |        |                                |   |            |  |   | (2,866)  |  |   |      |  |   |        |  |   | (2,866)  | 
|Basic loss from continuing operations applicable to common stock per share     |  | $                      | (0.16)   |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | (0.18)   |  | $ |      |  | $ | 0.02    |  | $ | (0.16)   | 
|Basic loss per share                                                           |  | $                      | (0.16)   |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | (0.18)   |  | $ |      |  | $ |        |  | $ | (0.18)   | 
|Diluted loss from continuing operations applicable to common stock per share   |  | $                      | (0.16)   |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | (0.18)   |  | $ |      |  | $ | 0.02    |  | $ | (0.16)   | 
|Diluted loss per share                                                         |  | $                      | (0.16)   |                         | $ | (0.02)      |  | $                     |        |                                | $ |            |  | $ | (0.18)   |  | $ |      |  | $ |        |  | $ | (0.18)   | 



32



---

Restatement Adjustments



|(A) |  To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payers and doubtful accounts.
|--- | -------------------------------------------------------------------------------------------------------------------------



|(B) |  To expense professional fees incurred in connection with the September 2002 credit facility amendment which were being amortized over the term of the related agreement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(C) |  To calculate income (loss) per share using the two-class method.
|--- | ------------------------------------------------------------------



|(D) |  Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.
|--- | -----------------------------------------------------------------------------------------------------------



|(2) | In fiscal 2001, we recorded a $1.5 million restructuring charge relating to an under performing service area that we had planned to exit at the time of contract termination in
December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the related municipality to enable it to transition its medical transportation service to a new provider. In connection with the contract extension,
we reversed $0.2 million of previously accrued lease termination costs relating to the extension period. The operating environment in the service area subsequently improved, and we were awarded a new multi-year contract during the second quarter of
fiscal 2003. We reversed the remaining restructuring reserve of $1.3 million to income during the second quarter of 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | During the first quarter of fiscal 2003, we sold our Latin American operations to local management in exchange for the assumption of the related net liabilities resulting in a gain
of $12.5 million. The sale of the Latin American operations has been treated as a discontinued operation for financial reporting purposes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | During the third quarter of fiscal 2002, we reversed $1.7 million of discretionary employee benefits previously accrued for the calendar year ended December 31, 2000. During the
fourth quarter of fiscal 2002, we recorded a $2.0 million provision for additional workers compensation claims in connection with a review of existing reserve levels; reversed a $1.3 million reserve related to the settlement of an audit with a
Medicare intermediary; and, reversed $1.3 million of our paid-time-off accrual as a result of changes to the related policies.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | During the second quarter of fiscal 2002, we recorded a $1.6 million tax benefit for refunds applicable to prior years for which recognition was deferred until receipt. In the
fourth quarter of fiscal 2002, we recognized an income tax benefit of $0.6 million as a result of recently enacted legislation that allowed us to carry a portion of our net operating losses back to prior years.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | The net loss for the first quarter of fiscal 2002 included a $49.5 million cumulative effect charge, both before and after taxes, relating to the implementation of a new accounting
standard relating to goodwill and other intangible assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Effects of Inflation and Foreign Currency Exchange Fluctuations



As a result of the sale of our Latin American operations in September 2002, we no longer have operations located outside the United States. Additionally, inflation has not had a significant impact on our business.



Contractual Obligations and Other Commitments



We have certain contractual obligations related to our debt instruments that
come due at various times over the periods presented below. In addition we have other commitments in the form of standby letters of credit and surety bonds. The following table illustrates the expiration of our contractual obligations as well as
other commitments including the effect of the 2003 amended credit facility:



|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      
|---------------------------------- |  | ----------------------------------------- | ------- | ---------------- | - | --------- |  | --------- | ------ | ------------- | - | ------- |  | - | -----
|                                   |  | Payments Due By Period                   
|Contractual Obligations            |  | Total                                     |         | Less Than 1 Year |   | 1-3 Years |  | 4-5 Years |        | After 5 Years
|Credit facility                    |  | $                                         | 152,555 |                  | $ |          |  | $         |        |               | $ | 152,555 |  | $ |     
|Senior Notes                       |  |                                           | 150,000 |                  |   |          |  |           |       |               |   | 150,000 |  |   |     
|Capital leases and notes payable   |  |                                           | 4,368   |                  |   | 1,329     |  |           | 2,901  |               |   | 50      |  |   | 88   
|Operating leases                   |  |                                           | 35,344  |                  |   | 7,760     |  |           | 12,084 |               |   | 6,667   |  |   | 8,833
|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      
|Total contractual cash obligations |  | $                                         | 342,267 |                  | $ | 9,089     |  | $         | 14,985 |               | $ | 309,272 |  | $ | 8,921
|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      
|                                   | 
|Other Commitments                  |  | Amount of Commitment Expiration By Period
|Standby letters of credit          |  | $                                         | 3,500   |                  | $ | 3,500     |  | $         |       |               | $ |        |  | $ |     
|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      
|Surety bonds                       |  | $                                         | 10,136  |                  | $ | 10,129    |  | $         | 7      |               | $ |        |  | $ |     
|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      
|Preferred stock redemption         |  | $                                         | 25,000  |                  | $ |          |  | $         | 15,000 |               | $ | 10,000  |  | $ |     
|                                   |  |                                           |         |                  |   |           |  |           |        |               |   |         |  |   |      



33



---

Recently Issued Accounting Pronouncements



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies,
relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 is to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not
have a material impact on our financial condition or results of operations. Note 17, to our consolidated financial statements contains additional information with respect to our guarantees and indemnifications.



In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46) to clarify when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest
entity or VIE. FIN 46 provides general guidance as to the definition of a VIE and requires that such VIEs be consolidated if a company absorbs the majority of the VIEs expected losses, or is entitled to receive a majority of the VIEs residual
returns, or both. FIN 46 is effective immediately for all new VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the consolidation provisions of FIN 46 must be applied for the first interim or annual reporting period
beginning after June 15, 2003 on either a retroactive or prospective basis.



We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that
we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously
reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46. We do not believe that we have any other investments or contractual
obligations that would require consolidation under FIN 46.



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 specifies that freestanding financial instruments within its scope constitute
obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include certain mandatorily redeemable financial instruments, obligations to repurchase the issuers equity
shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is
effective July 1, 2003. We are in the process of evaluating the impact of FAS No. 150 on our consolidated financial statements.



34



---

RISK FACTORS



The following risk factors, in addition to those discussed elsewhere in this report, should be carefully considered in
evaluating us and our business.



We have significant indebtedness.



We have significant indebtedness. As of June 30, 2003, we
had approximately $306.6 million of consolidated indebtedness, consisting primarily of $149.9 million of 7 7/8% Senior Notes due in 2008 and $152.4 million outstanding under our credit facility. As a result of the September 30, 2003 amendment, we
have $152.6 million outstanding under our 2003 Amended Credit Facility, which is now due December 31, 2006.



Our ability to service our indebtedness depends on our future operating performance, which is affected by various factors including regulatory, industry,
economic, and competitive conditions, and other factors, many of which are beyond our control. We may not generate sufficient funds to enable us to service our indebtedness and failure to do so could have a material adverse effect on our business,
financial condition, results of operations and cash flows.



Our loan
agreements require us to comply with numerous covenants and restrictions.



The agreement governing the terms of the Senior Notes contains certain covenants limiting our ability to:



| |  | incur certain additional debt
| | - | -----------------------------



| |  | create certain liens
| | - | --------------------



| |  | pay dividends
| | - | -------------



| |  | issue guarantees
| | - | ----------------



| |  | redeem capital stock
| | - | --------------------



| |  | enter into transactions with affiliates
| | - | ---------------------------------------



| |  | make certain investments
| | - | ------------------------



| |  | sell assets
| | - | -----------



| |  | issue capital stock of subsidiaries
| | - | -----------------------------------



| |  | complete certain mergers and consolidations
| | - | -------------------------------------------



Our 2003 Amended Credit Facility also contains restrictive covenants and requires us to meet certain financial tests, including a total debt leverage
ratio, a minimum tangible net worth amount, and a fixed charge coverage ratio. Our ability to satisfy those covenants can be affected by events both within and beyond our control, and we may be unable to meet these covenants.



A breach of any of the covenants or other terms of our indebtedness could
result in an event of default under our 2003 Amended Credit Facility or the Senior Notes or both, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.



We may not be able to generate sufficient operating cash flow.



Despite significant net losses in fiscal 2002, 2001 and 2000, our
restructuring efforts have enabled us to self-fund our operations since March 2000 from existing cash reserves and operating cash flow. However, we may be unable to sustain our targeted levels of operating cash flow. Our ability to generate
operating cash flow will depend upon various factors, including regulatory, industry, economic, competitive and other factors, many of which are beyond our control. Because of our significant indebtedness, a substantial portion of our cash flow from
operating activities is dedicated to debt service and is not available for other purposes. The terms of our 2003 Amended Credit Facility do not permit additional borrowings thereunder. In addition, the 2003 Amended Credit Facility and the Senior
Notes restrict our ability to obtain additional debt from other sources or provide collateral to any prospective lender.



If we are unable to meet our targeted levels of operating cash flow, or in the event of an unanticipated cash requirement (such as an adverse litigation
outcome, reimbursement delays, significantly increased costs of insurance or other matters) we will need to pursue additional debt or equity financing. Any such financing may not be available on terms acceptable to us, or at all. If we issue equity
securities in connection with any such arrangement, the percentage ownership of our current stockholders could be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders.
Failure to generate adequate operating cash flow will have a material adverse effect on our business, financial condition and results of operations.



35



---

We face significant dilution of our common stock.



In conjunction with the 2002 Amended Credit Facility, we issued shares of our Series B redeemable nonconvertible
participating preferred stock (the Series B Shares) to the participants in the 2002 Amended Credit Facility. The Series B Shares are not convertible by the holder but we may elect (subject to approval by our shareholders of an increase
in the number of authorized common shares) to settle the Series B Shares by issuance of 2,115,490 common shares which equates to 10% of our common shares then outstanding on a diluted basis, as defined. Because sufficient common shares are not
currently available to permit conversion, we have agreed to use our best efforts to obtain stockholder approval to authorize additional common shares. Until such time as the additional common shares are authorized, the carrying value of the Series B
Shares will be accreted to the greater of $15.0 million or the value of the commons shares into which the Series B Shares would have otherwise been converted which represents the redemption value of the Series B shares as of December 31, 2004.
Additionally, holders of the Series B Shares are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. The accretion and allocation of earnings to the Series B
Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed, will result in a reduction in income available to common stockholders for purposes of determining our earnings per
share.



In conjunction with the 2003 Amended Credit Facility,
we issued shares of our Series C redeemable nonconvertible participating preferred stock (the Series C Shares) to certain of the participants in the 2003 Amended Credit Facility. The Series C Shares are not convertible by the holder but
we may elect (subject to approval by our shareholders of an increase in the number of authorized common shares) to settle the Series C Shares by issuance of 2,839,787 common shares which equates to 11% of our common shares then outstanding on a
diluted basis, as defined. Because sufficient common shares are not currently available to permit conversion, we have agreed to use our best efforts to obtain stockholder approval to authorize additional common shares. Until such time as the
additional common shares are authorized, the carrying value of the Series C Shares will be accreted to the greater of $10.0 million or the value of common shares into which the Series C Shares would have otherwise been converted which represents the
redemption value of the Series C shares as of December 31, 2006. Additionally, holders of the Series C Shares are entitled to participate in any common dividends declared by the Board of Directors as if the Series C holders had been issued common
stock. The accretion and allocation of earnings to the Series C Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed, will result in a reduction in income available to
common stockholders for purposes of determining our earnings per share.



We
depend on reimbursements by third-party payers and individuals.



We receive a substantial portion of payments for our medical transportation services from third-party payers, including Medicare, Medicaid, and private insurers. We received approximately 90% of our medical transportation fee collections
from such third party payers during the year ended June 30, 2003, including approximately 27% from Medicare. In the year ended June 30, 2002, we received 88% of medical transportation fee collections from these third parties, including 25% from
Medicare.



The reimbursement process is complex and can involve
lengthy delays. From time to time, we experience these delays. Third-party payers are continuing their efforts to control expenditures for health care, including proposals to revise reimbursement policies. We recognize revenue when we provide
medical transportation services; however, there can be lengthy delays before we receive payment. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on assertions that certain amounts are not
reimbursable or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. Due to the nature of our business and our participation in the Medicare and Medicaid reimbursement
programs, we are involved from time to time in regulatory reviews or investigations by governmental agencies of matters such as compliance with billing regulations. We may be required to repay these agencies if a finding is made that we were
incorrectly reimbursed, or we may lose eligibility for certain programs in the event of certain types of non-compliance. Delays and uncertainties in the reimbursement process adversely affect our level of accounts receivable, increase the overall
costs of collection, and may adversely affect our working capital and cause us to incur additional borrowing costs. Unfavorable resolutions of pending or future regulatory reviews or investigations, either individually or in the aggregate, could
have a material adverse effect on our business, financial condition, results of operations and cash flows.



36



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We also face the continuing risk of non-reimbursement to the extent that uninsured individuals require
emergency ambulance service in service areas where an adequate subsidy is not provided by the related municipality or governing authority. Amounts not covered by third-party payers are the obligations of individual patients and, we may not receive
reimbursement by the related municipality or governing authority or reimbursement from these uninsured individuals. We continually review the mix of activity between emergency and general medical transport in view of the reimbursement environment
and evaluate methods of recovering these amounts through the collection process.



We establish an allowance for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts based on credit risk applicable to certain types of payers, historical trends, and other
relevant information. We review our allowance for doubtful accounts on an ongoing basis and may increase or decrease such allowance from time to time, including in those instances when we determine that the level of effort and cost of collection of
certain accounts receivable is unacceptable.



The risks
associated with third-party payers and uninsured individuals and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition, cash flows, and results of operations.
Our collection policies or our allowance for doubtful accounts may not be adequate.



We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.



We have experienced a substantial rise in the costs associated with both our insurance and surety bonding programs in comparison to prior years. We have
experienced significant increases both in the premiums we have had to pay, and in the collateral or other advance funding required. We also have increased our deductible and self-insurance retentions under several coverages. Many counties,
municipalities, and fire districts also require us to provide a surety bond or other assurance of financial and performance responsibility, and the cost and collateral requirements associated with obtaining such bonds have increased. A significant
factor is the overall hardening of the insurance, surety and re-insurance markets, which has resulted in demands for larger premiums, collateralization of payment obligations and increasingly rigorous underwriting requirements. Our higher costs also
result from our claims history and from insurers and sureties perception of our financial condition due to our current debt structure and cash position. Sustained and substantial annual increases in premiums and requirements for
collateral or pre-funded deductible obligations may have a material adverse effect on our business, financial condition, cash flow and results of operations.



Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.



We are subject to a significant number of accident, injury and professional
liability claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize the risk of our exposure, we maintain certain levels of insurance coverage for workers compensation, comprehensive
general liability, automobile liability, and professional liability claims. In certain limited instances we may not have coverage for certain claims. In those instances for which we do have coverage, the coverage limits of our policies may not be
adequate. Liabilities in excess of our insurance coverage could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Claims against us, regardless of their merit or outcome, also may have an
adverse effect on our reputation and business.



Our claim reserves may prove
inadequate.



Under our general liability and employee
medical insurance programs, and under our workers compensation programs prior to May 1, 2002, we are responsible for deductibles and self-insured retentions in varying amounts. Our insurance coverages in prior years generally did not include
an aggregate limitation on our liability. We have established reserves for losses and loss adjustment expenses under these policies. Our reserves are estimates based on our historical experience as well as industry data, and include judgments of the
effects that future economic and social forces are likely to have on our experience with the type of risk involved, circumstances surrounding individual claims and trends that may affect the probable number and nature of claims arising from losses
not yet reported. Consequently, loss reserves are inherently uncertain and are subject to a number of circumstances that are difficult to predict. For these reasons, there can be no assurance that our ultimate liability will not materially exceed



37



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our reserves at any point. If our reserves prove to be inadequate, we will be required to increase our reserves with a corresponding charge to operations in
the period in which the deficiency is identified and such charge could be material. We periodically engage independent actuaries in order to verify the adequacy of our claim reserves.



Two insurance companies with which we have previously done business are in financial distress.



Two previous insurers (Reliance Insurance Company and Legion Insurance
Company) under our workers compensation and general liability programs are currently in liquidation proceedings in Pennsylvania. With respect to the affected policy years, these proceedings may result in the loss of all or part of the
collateral and/or funds deposited by us for payment of claims within our deductible or self-insured retention relating to our workers compensation programs, and may result in restricted access to both insurance and reinsurance proceeds
relating to our general liability program. Based upon the information currently available, we believe that the amounts on deposit are fully recoverable and will either be returned to us or used to pay claims on our behalf as originally intended. We
further believe that reinsurance proceeds for our liability policies will be available to cover claims in excess of our retention as originally intended. It is also our understanding that state guaranty funds will provide coverage, subject to
certain limitations, of such general liability and workers compensation. Our inability to access the funds on deposit, to access our liability reinsurance proceeds or to obtain coverage from state guaranty funds could have a material adverse effect
on our business, financial condition, results of operations and cash flows. To the extent that claims exceed our deductible limits and our insurers or guaranty funds do not satisfy their coverage obligations, we may be required to satisfy a portion
of those claims directly, which could have a material adverse effect on our business, financial condition, result of operations and cash flows.



Recently enacted rules may adversely affect our reimbursement rates of coverage.



On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels
of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54 (which is adjusted each
year by the CPI  1%), plus separate mileage payment based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and
higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on Medicare claims, which means a provider, must accept
Medicares allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. In addition, the Final Rule calls for a five-year phase-in
period to allow time for providers to adjust to the new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter.



We believe the Medicare Ambulance Fee Schedule will have a neutral net impact
on our medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of our U.S. operations. However, changes in the related rules or regulations, or the interpretation or implementation thereof,
could materially alter the impact of the fee schedule on our medical transportation revenue and, therefore could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Changes in reimbursement
policies, or other governmental actions, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements.
A reduction in coverage or reimbursement rates by third-party payers, or an increase in our cost structure relative to the rate increase in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a
material adverse effect on our business, financial condition, cash flows, and results of operations.



Certain state and local governments regulate rate structures and limit rates of return.



State or local government regulations or administrative policies regulate rate structures in most states in which we conduct medical transportation
operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract and establishes the rates for general ambulance
services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. For example, the State of Arizona establishes the rate of return we are permitted to earn in determining
the ambulance service rates we may



38



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charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 19.0% and 17.9% of net revenue for the year ended June 30,
2003 and 2002, respectively. We may be unable to receive ambulance service rate increases on a timely basis where rates are regulated or to establish or maintain satisfactory rate structures where rates are not regulated.



Municipalities and fire districts negotiate the payments to be made to us for
fire protection services pursuant to master contracts. These master contracts are based on a budget and on level of effort or performance criteria desired by the municipalities and fire districts. We could be unsuccessful in negotiating or
maintaining profitable contracts with municipalities and fire districts.



Numerous governmental entities regulate our business.



Numerous federal, state and local laws, rules and regulations govern various aspects of the ambulance and fire fighting service business covering matters such as licensing, rates, employee certification, environmental matters and radio
communications. Certificates of necessity may be required from state or local governments to operate medical transportation services in a designated service area. Master contracts from governmental authorities are subject to risks of cancellation or
unenforceability as a result of budgetary and other factors and may subject us to certain liabilities or restrictions that traditionally have applied only to governmental bodies. Federal, state or local, governments could:



| |  | change existing laws, rules or regulations,
| | - | -------------------------------------------



| |  | adopt new laws, rules or regulations that increase our cost of doing business,
| | - | ------------------------------------------------------------------------------



| |  | lower reimbursement levels,
| | - | ---------------------------



| |  | choose to provide services for themselves, or
| | - | ---------------------------------------------



| |  | otherwise adversely affect our business, financial condition, cash flows, and results of operations.
| | - | ----------------------------------------------------------------------------------------------------



We could encounter difficulty in complying with all applicable laws, rules and regulations.



Health care reforms and cost containment may affect our business.



Numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system. We cannot predict which, if any, health care reforms may be proposed or enacted or the effect that any such legislation would have on our business. The Health Insurance Portability and Accountability Act
of 1996 (HIPAA), which protects the privacy of patients health information handled by health care providers and establishes standards for its electronic transmission, was enacted on August 21, 1996. The final rule, which took effect on April
14, 2001, requires covered entities to comply with the final rules provisions pertaining to privacy standards by April 14, 2003, and covers all individually identifiable health information used or disclosed by a covered entity. We have
addressed the impact of HIPAA and developed policies, training and procedures to comply with the final rule.



In addition to compliance with the privacy standards deadline, the HIPAA Electronic Transactions and Code Set Rule requires us, if we submit claims
electronically, to use the approved HIPAA format by October 16, 2003. On September 23, 2003, CMS announced that it will issue a contingency plan to accept Medicare noncompliant electronic transactions after the October 16, 2003 compliance deadline.
The contingency plan permits CMS to continue to accept and process Medicare claims in the electronic formats now in use, giving providers, like us, additional time to complete the testing process. Although CMS announced a contingency plan, as of
this filing, a Medicaid contingency plan has not been announced. We submit Medicaid claims to the twenty-seven states, of which eleven states require electronic claim submissions and sixteen require paper claim submissions. As of September 24, 2003,
we received confirmation of successful test filings for electronic claims from four of the eleven states which require electronic claim submissions. New York Medicaid has announced that it will not be ready to accept electronic claim submissions in
the approved HIPAA format. Although we will submit our test filings to the remaining six states in advance of the October 16, 2003 deadline, those states may not have the resources and/or funding to meet the regulatory requirements for electronic
claims submissions and may not be able to respond to all of the test submissions by us and other providers before the deadline. As a result, we may be required to submit our claims by paper (rather than electronically), which may extend the payment
cycle an additional thirty days or more. In addition, we await announcements from the commercial insurers regarding compliance with the Rule. Thus, while we have worked diligently to both comply with HIPAA requirements and mitigate the impact of
HIPAA on our business, we could experience a material adverse effect on our business, financial condition, cash flows or results of operations due to (i) significant costs associated with continued compliance under HIPAA or related legislative
enactments, (ii) adverse affects on our collection cycle arising from non-compliance or delayed HIPAA compliance by our payers, customers and other constituents, or (iii) impacts to the health care industry as a whole that may directly or indirectly
cause an adverse affect on our business.



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We may be delisted from the Nasdaq SmallCap Market.



On May 22, 2003, the Nasdaq Stock Market (Nasdaq) notified us that we were not in compliance with a Nasdaq SmallCap Market
maintenance standard. This standard requires that we file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.



The notification followed our announcement on May 14, 2003 that we would
delay filing our Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate our financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts
recorded in prior years. We announced that we would file the applicable Form 10-Q upon finalization of the related restatement adjustments.



We subsequently submitted our request for a Nasdaq Listing Qualifications Panel (the Panel) hearing to consider our continued listing. The
hearing was held June 19, 2003, where we presented our basis for a temporary exception to the filing requirement in order to complete our accounts receivable analysis.



On July 17, 2003, Nasdaq informed us that the Panel had made a determination to grant us an exception. In its decision the
Panel determined that our securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing our Form 10-Q for the third quarter ended March 31, 2003 and our Form 10-K for the fiscal
year ended June 30, 2003.



In addition to granting the filing
exception through September 30, 2003, the Panel specifically required us to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should we miss a filing
deadline in accordance with the exception, we will not be entitled to a new hearing on the matter and our securities may be delisted from The Nasdaq SmallCap Market. In the event we fail to comply with any continued listing requirement during the
exception period, we will be provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panels decision as to whether continued listing is appropriate.



The Panel reserved the right to terminate or modify the terms of this
exception upon a review of the Companys reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There is no assurance that we will evidence compliance with the requirements as set forth by
Nasdaq or that we will return to continued listing on The Nasdaq SmallCap Market.



On September 29, 2003, we issued a press release indicating that the filing of our Form 10-K for fiscal 2003 would be delayed. We also filed a Form 12b-25 request with the SEC for an extension to file our Form 10-K on
or before October 14, 2003. Due to such delayed filing, we formally requested, on September 30, 2003, that the Panel permit us to comply with their July 17, 2003 decision by filing both our Form 10-K for fiscal 2003 and our Form 10-Q for the period
ended March 31, 2003 on or before October 14, 2003. On October 7, 2003, the Panel informed us that our requested modification to their July 17, 2003 decision was granted.



We depend on certain business relationships.



We depend to a great extent on certain contracts with municipalities or fire districts to provide emergency ambulance
services and fire protection services. Our six largest contracts accounted for approximately 22.9% and 21.9% of net revenue for the year ended June 30, 2003 and 2002, respectively. One of these contracts accounted for approximately 8.2% and 7.3% of
net revenue for the years ended June 30, 2003 and 2002, respectively. Contracts with municipalities or fire districts may have certain budgetary approval constraints. Failure to allocate funds for a contract may adversely affect our ability to
continue to perform services without suffering significant losses. The loss or cancellation of several of these contracts could have a material adverse effect on our business, financial condition, cash flow, and results of operations. We may not be
successful in retaining our existing contracts or in obtaining new contracts for emergency ambulance services or for fire protection services.



Our contracts with municipalities and fire districts and with managed care organizations and health care providers are short term or open-ended or for
periods ranging on average from two years to five years. During such periods, we may determine that a contract is no longer favorable and may seek to modify or terminate the contract. When making such a determination, we may consider factors, such
as weaker than expected transport volume,



40



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geographical issues adversely affecting response times, and delays in implementing technology upgrades. We face certain risks in attempting to terminate
unfavorable contracts prior to their expiration because of the possibility of forfeiting performance bonds and the potential adverse political and public relations consequences. Our inability to terminate or amend unfavorable contracts as they
occur, could, in the aggregate, have a material adverse effect on our business, financial condition, cash flows, and results of operations. We also face the risk that areas in which we provide fire protection services through subscription
arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities.



We face risks associated with our prior rapid growth, integration, and acquisitions.



We must integrate and successfully operate the ambulance service providers that we have acquired. The process of integrating
management, operations, facilities, and accounting and billing and collection systems and other information systems requires continued investment of time and resources and can involve difficulties, which could have a material adverse effect on our
business, financial condition, cash flows, and results of operations. Unforeseen liabilities and other issues also could arise in connection with the operation of businesses that we have previously acquired or may acquire in the future. For example,
we became aware of, and have taken corrective action with respect to, various issues arising primarily from the transition to us from various acquired operations of Federal Communications Commission (FCC) licenses for public safety and private
wireless radio frequencies used in the ordinary course of our business. While we do not currently anticipate that action with respect to these issues by the FCCs enforcement bureau will result in material monetary fines or license forfeitures,
there can be no assurance that this will be the case. Our acquisition agreements contain purchase price adjustments, rights of set-off, indemnification, and other remedies in the event that certain unforeseen liabilities or issues arise in
connection with an acquisition. However, these purchase price adjustments, rights of set-off, indemnification, and other remedies expire and may not be sufficient to compensate us in the event that any liabilities or other issues arise.



We face additional risks associated with our international operations.



Due to the deteriorating economic conditions and continued devaluation of
the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, primarily in Argentina. We determined that we would benefit from focusing on our domestic operations. Effective September 27,
2002, we sold our Latin American operations to local management. We believe that both the structure of our pre-sale operations and of the sale transaction itself shield us from liabilities associated with past or future activities of our former
Latin American operations. However, due to the nature of local laws and regulatory requirements and the uncertain economic and political environment, particularly in Argentina, there can be no assurance that we will not be required to defend against
future claims. Unanticipated claims successfully asserted against us could have an adverse effect on our business, financial condition, cash flows, and results of operations.



We are in a highly competitive industry.



The ambulance service industry is highly competitive. Ambulance and general medical transportation service providers compete primarily on the basis of
quality of service, performance, and cost. In order to compete successfully, we must make continuing investments in our fleet, facilities, and operating systems. We believe that counties, fire districts, and municipalities and health/care
institutions consider the following factors in awarding a contract:



| |  | quality of medical care,
| | - | ------------------------



| |  | historical response time performance,
| | - | -------------------------------------



| |  | customer service,
| | - | -----------------



| |  | financial stability, and
| | - | ------------------------



| |  | personnel policies and practices.
| | - | ---------------------------------



We currently compete with the following entities to provide ambulance services:



| |  | governmental entities (including fire districts),
| | - | -------------------------------------------------



| |  | hospitals,
| | - | ----------



| |  | other national ambulance service providers,
| | - | -------------------------------------------



| |  | large regional ambulance service providers, and
| | - | -----------------------------------------------



| |  | local and volunteer private providers.
| | - | --------------------------------------



41



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Counties, municipalities, fire districts, and health care organizations that currently contract for
ambulance services could choose to provide ambulance services directly in the future. We are experiencing increased competition from fire departments in providing emergency ambulance service. Some of our current competitors and certain potential
competitors have or have access to greater capital and other resources than us.



Tax-supported fire districts, municipal fire departments, and volunteer fire departments represent the principal providers of fire protection services for residential and commercial properties. Private providers
represent only a small portion of the total fire protection market and generally provide services where a tax-supported municipality or fire district has decided to contract for these services or has not assumed the financial responsibility for fire
protection. In these situations, we provide services for a municipality or fire district on a contract basis or provide fire protection services directly to residences and businesses who subscribe for this service. We cannot provide assurance that:



| |  | we will be able continue to maintain current contracts or subscriptions or to obtain additional fire protection business on a contractual or subscription basis;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | fire districts or municipalities will not choose to provide fire protection services directly in the future; or
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | areas in which we provide services through subscriptions will not be converted to tax-supported fire districts or annexed by municipalities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



We depend on our management and other key personnel.



Our success depends upon our ability to recruit and retain key personnel. We
could experience difficulty in retaining our current key personnel or in attracting and retaining necessary additional key personnel. Medical personnel shortages in certain market areas currently makes the recruiting, training, and retention of
full-time and part-time personnel more difficult and costly, including the cost of overtime wages. Our internal growth will further increase the demand on our resources and require the addition of new personnel. We have entered into employment
agreements with certain of our executive officers and certain other key personnel. Failure to retain or replace our key personnel may have an adverse effect on our business, financial condition, cash flows and results of operations.



It may be difficult for a third party to acquire us.



Certain provisions of our certificate of incorporation, shareholders
rights plan and Delaware law could make it more difficult for a third party to acquire control of our company, even if a change in control might be beneficial to stockholders. This could discourage potential takeover attempts and could adversely
affect the market price of our common stock.



|ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risks
|-------- | -----------------------------------------------------------



Our primary exposure to market risk consists of changes in interest rates on our borrowing activities. Amounts outstanding under our 2003 Amended Credit
Facility bear interest at LIBOR plus 7.0%. A 1% increase in the LIBOR rate would increase our interest expense on an annual basis by approximately $1.5 million. The remainder of our debt is primarily at fixed interest rates. We monitor this risk
associated with interest rate changes and may enter into hedging transactions, such as interest rate swap agreements, to mitigate the related exposure.



|ITEM 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



Our Consolidated Financial Statements for the fiscal year ended June 30, 2001 and the related report of Singer Lewak Greenbaum and Goldstein LLP and our
Consolidated Financial Statements as of June 30, 2003 and 2002 and for each of the fiscal years then ended together with related notes and the report of PricewaterhouseCoopers LLP are set forth herein.



42



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REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Stockholders of Rural/Metro Corporation:



In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in
stockholders equity (deficit), and of cash flows present fairly, in all material respects, the financial position of Rural/Metro Corporation and its subsidiaries (the Company) at June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the two years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



As discussed in Note 2, the Company restated its consolidated
financial statements as of and for the year ended June 30, 2002, to adjust its accounts receivable and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers

and for doubtful accounts as well as to defer enrollment fees relating to its fire protection service contracts.



As discussed in Note 2, the Company restated its consolidated financial statements for the
year ended June 30, 2003 to reflect earnings per share using the two-class method.



As discussed in Note 2, the Company changed its method of accounting for variable interest entities. Additionally, as discussed in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001.



PricewaterhouseCoopers LLP

Phoenix, Arizona

October 13, 2003, except as to the matter referred to

in the section of Note 2 entitled Earnings Per Share

as to which
the date is February 17, 2004



43



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INDEPENDENT AUDITORS REPORT



To the Board of Directors

Rural/Metro
Corporation

Scottsdale, Arizona



We have audited the accompanying restated, consolidated statements of operations, changes in stockholders equity (deficit) stockholders deficit, and cash
flows of Rural/Metro Corporation and subsidiaries for the year ended June 30, 2001. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements on our
audit.



We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the restated, consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Rural/Metro Corporation and subsidiaries for the year ended June 30,
2001 in conformity with accounting principles generally accepted in the United States of America.



As described in Note 2 to the consolidated financial statements, the Company restated its consolidated financial statements to reflect the consolidation of its investments in San Diego Medical Services Enterprises LLC
upon adoption of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.



As described in Note 2 to the consolidated financial statements, the June 30, 2001 consolidated financial statements have been restated due
to the understatement of Medicare, Medicaid and contractual discounts and doubtful accounts related to the Companys accounts receivables allowances.



As described in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001.



SINGER LEWAK GREENBAUM & GOLDSTEIN LLP



Los Angeles, California

October 13, 2003



44



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RURAL/METRO CORPORATION

CONSOLIDATED BALANCE SHEET

June 30, 2003 and 2002



|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | --------------- | - | -------- | -
|                                                                                                                                                                                                                                                  |  | 2003           |          |   | 2002            |  
|                                                                                                                                                                                                                                                  |  | (in thousands) |         
|                                                                                                                                                                                                                                                  |  |                |          |   | (As Restated *) |  
|ASSETS                                                                                                                                                                                                                                            |  |                |          |   |                 |   |          |  
|Current assets:                                                                                                                                                                                                                                   |  |                |          |   |                 |   |          |  
|Cash                                                                                                                                                                                                                                              |  | $              | 12,561   |   |                 | $ | 10,677   |  
|Accounts receivable, net of allowance for doubtful accounts of $48,422 million and $37,966 million respectively                                                                                                                                   |  |                | 60,428   |   |                 |   | 64,461   |  
|Inventories                                                                                                                                                                                                                                       |  |                | 11,504   |   |                 |   | 12,220   |  
|Prepaid expenses and other                                                                                                                                                                                                                        |  |                | 7,511    |   |                 |   | 7,231    |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Total current assets                                                                                                                                                                                                                              |  |                | 92,004   |   |                 |   | 94,589   |  
|Property and equipment, net                                                                                                                                                                                                                       |  |                | 43,010   |   |                 |   | 48,532   |  
|Goodwill                                                                                                                                                                                                                                          |  |                | 41,167   |   |                 |   | 41,244   |  
|Insurance deposits                                                                                                                                                                                                                                |  |                | 7,937    |   |                 |   | 8,228    |  
|Other assets                                                                                                                                                                                                                                      |  |                | 12,048   |   |                 |   | 8,115    |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|                                                                                                                                                                                                                                                  |  | $              | 196,166  |   |                 | $ | 200,708  |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|LIABILITIES, MINORITY INTERESTS, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                    |  |                |          |   |                 |   |          |  
|Current liabilities:                                                                                                                                                                                                                              |  |                |          |   |                 |   |          |  
|Accounts payable                                                                                                                                                                                                                                  |  | $              | 13,778   |   |                 | $ | 13,262   |  
|Accrued liabilities                                                                                                                                                                                                                               |  |                | 57,698   |   |                 |   | 73,694   |  
|Deferred revenue                                                                                                                                                                                                                                  |  |                | 17,603   |   |                 |   | 16,695   |  
|Current portion of long-term debt                                                                                                                                                                                                                 |  |                | 1,329    |   |                 |   | 1,633    |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Total current liabilities                                                                                                                                                                                                                         |  |                | 90,408   |   |                 |   | 105,284  |  
|Long-term debt, net of current portion                                                                                                                                                                                                            |  |                | 305,310  |   |                 |   | 298,529  |  
|Other liabilities                                                                                                                                                                                                                                 |  |                | 181      |   |                 |   | 477      |  
|Deferred income taxes                                                                                                                                                                                                                             |  |                | 650      |   |                 |   | 650      |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Total liabilities                                                                                                                                                                                                                                 |  |                | 396,549  |   |                 |   | 404,940  |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Minority interests                                                                                                                                                                                                                                |  |                | 1,984    |   |                 |   | 1,520    |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Series B redeemable nonconvertible participating preferred stock, $.01 par value 634,647 shares authorized, 211,549 shares issued and
outstanding at June 30, 2003; including accumulated accretion of $3,604 (redemption value of $15.0 million) |  |                | 7,793    |   |                 |   |         |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Commitments and contingencies                                                                                                                                                                                                                     |  |                |         |   |                 |   |         |  
|Stockholders equity (deficit):                                                                                                                                                                                                                   |  |                |          |   |                 |   |          |  
|Common stock, $.01 par value, 23,000,000 shares authorized, 16,207,830 and 15,651,095 shares issued and outstanding at June 30, 2003 and 2002,
respectively                                                                                       |  |                | 166      |   |                 |   | 159      |  
|Additional paid-in capital                                                                                                                                                                                                                        |  |                | 135,405  |   |                 |   | 138,470  |  
|Treasury stock, at cost, 149,456 shares at June 30, 2003 and 2002                                                                                                                                                                                 |  |                | (1,239   | ) |                 |   | (1,239   | )
|Accumulated deficit                                                                                                                                                                                                                               |  |                | (344,492 | ) |                 |   | (353,458 | )
|Accumulated other comprehensive income                                                                                                                                                                                                            |  |                |         |   |                 |   | 10,316   |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|Total stockholders equity (deficit)                                                                                                                                                                                                              |  |                | (210,160 | ) |                 |   | (205,752 | )
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  
|                                                                                                                                                                                                                                                  |  | $              | 196,166  |   |                 | $ | 200,708  |  
|                                                                                                                                                                                                                                                  |  |                |          |   |                 |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



See accompanying notes



45



---

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

For The Years Ended June 30, 2003, 2002
and 2001



|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | --------------- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                                                                                                                                                |  | 2003                                    |         |   | 2002            |   |         | 2001 | 
|                                                                                                                                                                                                                                                |  | (in thousands except per share amounts) |        
|                                                                                                                                                                                                                                                |  |                                         |         |   | (As Restated *) |   |         |      | 
|Net revenue                                                                                                                                                                                                                                     |  | $                                       | 520,477 |   |                 | $ | 488,980 |      |  | $ | 479,414  |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Operating expenses:                                                                                                                                                                                                                             |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Payroll and employee benefits                                                                                                                                                                                                                   |  |                                         | 284,021 |   |                 |   | 269,123 |      |  |   | 271,976  |  
|Provision for doubtful accounts                                                                                                                                                                                                                 |  |                                         | 85,046  |   |                 |   | 77,725  |      |  |   | 86,876   |  
|Depreciation and amortization                                                                                                                                                                                                                   |  |                                         | 13,289  |   |                 |   | 16,267  |      |  |   | 25,741   |  
|Other operating expenses                                                                                                                                                                                                                        |  |                                         | 113,535 |   |                 |   | 103,280 |      |  |   | 131,889  |  
|Asset impairment charges                                                                                                                                                                                                                        |  |                                         |        |   |                 |   |        |      |  |   | 48,050   |  
|Contract termination costs and related asset impairment charges                                                                                                                                                                                 |  |                                         |        |   |                 |   | (107    | )    |  |   | 9,256    |  
|Restructuring and other                                                                                                                                                                                                                         |  |                                         | (1,421  | ) |                 |   | (718    | )    |  |   | 9,091    |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Total operating expenses                                                                                                                                                                                                                        |  |                                         | 494,470 |   |                 |   | 465,570 |      |  |   | 582,879  |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Operating income (loss)                                                                                                                                                                                                                         |  |                                         | 26,007  |   |                 |   | 23,410  |      |  |   | (103,465 | )
|Interest expense                                                                                                                                                                                                                                |  |                                         | (28,012 | ) |                 |   | (25,462 | )    |  |   | (30,624  | )
|Interest income                                                                                                                                                                                                                                 |  |                                         | 197     |   |                 |   | 644     |      |  |   | 642      |  
|Other income (expense) net                                                                                                                                                                                                                      |  |                                         | 146     |   |                 |   | 8       |      |  |   | (4,053   | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Loss from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle                                                                                                                  |  |                                         | (1,662  | ) |                 |   | (1,400  | )    |  |   | (137,500 | )
|Income tax (provision) benefit                                                                                                                                                                                                                  |  |                                         | (197    | ) |                 |   | 2,520   |      |  |   | (1,137   | )
|Minority interest                                                                                                                                                                                                                               |  |                                         | (1,507  | ) |                 |   | (750    | )    |  |   | 705      |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) from continuing operations before cumulative effect of change in accounting principle                                                                                                                                             |  |                                         | (3,366  | ) |                 |   | 370     |      |  |   | (137,932 | )
|Income (loss) from discontinued Latin American operations (including gain on disposal of $12,488 in fiscal 2003 and loss on disposition of
clinic operations of $9,374 in fiscal 2001), net of tax of $0 in 2003, $101 in 2002 and $364 in 2001 |  |                                         | 12,332  |   |                 |   | 979     |      |  |   | (67,358  | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) before cumulative effect of change in accounting principle                                                                                                                                                                        |  |                                         | 8,966   |   |                 |   | 1,349   |      |  |   | (205,290 | )
|Cumulative effect of change in accounting principle, net of tax of $0                                                                                                                                                                           |  |                                         |        |   |                 |   | (49,513 | )    |  |   |         |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Net income (loss)                                                                                                                                                                                                                               |  |                                         | 8,966   |   |                 |   | (48,164 | )    |  |   | (205,290 | )
|Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method                                                                                                                                |  |                                         | (804    | ) |                 |   |        |      |  |   |         |  
|Less: Accretion of redeemable nonconvertible participating preferred stock                                                                                                                                                                      |  |                                         | (3,604  | ) |                 |   |        |      |  |   |         |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Net income (loss) applicable to common stock                                                                                                                                                                                                    |  | $                                       | 4,558   |   |                 | $ | (48,164 | )    |  | $ | (205,290 | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) per share                                                                                                                                                                                                                         |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Basic                                                                                                                                                                                                                                          |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle                                                                                                                  |  | $                                       | (0.42   | ) |                 | $ | 0.02    |      |  | $ | (9.35    | )
|Income (loss) from discontinued operations applicable to common stock                                                                                                                                                                           |  |                                         | 0.70    |   |                 |   | 0.07    |      |  |   | (4.57    | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) before cumulative effect of change in accounting principle                                                                                                                                                                        |  |                                         | 0.28    |   |                 | $ | 0.09    |      |  |   | (13.92   | )
|Cumulative effect of change in accounting principle                                                                                                                                                                                             |  |                                         |        |   |                 |   | (3.26   | )    |  |   |         |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Net income (loss)                                                                                                                                                                                                                               |  | $                                       | 0.28    |   |                 | $ | (3.17   | )    |  | $ | (13.92   | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Diluted                                                                                                                                                                                                                                        |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle                                                                                                                  |  | $                                       | (0.42   | ) |                 | $ | 0.02    |      |  | $ | (9.35    | )
|Income (loss) from discontinued operations applicable to common stock                                                                                                                                                                           |  |                                         | 0.70    |   |                 |   | 0.07    |      |  |   | (4.57    | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Income (loss) before cumulative effect of change in accounting principle                                                                                                                                                                        |  |                                         | 0.28    |   |                 |   | 0.09    |      |  |   | (13.92   | )
|Cumulative effect of change in accounting principle                                                                                                                                                                                             |  |                                         |        |   |                 |   | (3.14   | )    |  |   |         |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Net income (loss)                                                                                                                                                                                                                               |  | $                                       | 0.28    |   |                 | $ | (3.05   | )    |  | $ | (13.92   | )
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Average number of common shares outstanding  Basic                                                                                                                                                                                             |  |                                         | 16,116  |   |                 |   | 15,190  |      |  |   | 14,744   |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  
|Average number of common shares outstanding  Diluted                                                                                                                                                                                           |  |                                         | 16,116  |   |                 |   | 15,773  |      |  |   | 14,744   |  
|                                                                                                                                                                                                                                                |  |                                         |         |   |                 |   |         |      |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



See accompanying notes



46



---

RURAL/METRO CORPORATION



CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)

For The Years Ended June 30, 2003, 2002 and 2001



|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | -------------- | --- | -------------------------- | - | ------- | -------------- |  | - | ------------------- | - |  | --------------------------------------------- | -------- | - | ----- | - | ------- | - |  | - | -------- | -
|                                                                                                                         |  | Common Stock   |     | Additional Paid-in Capital |   |         | Treasury Stock |  |   | Accumulated Deficit |   |  | Accumulated Other Comprehensive Income (loss) |          |   | Total |  
|                                                                                                                         |  | (in thousands) |    
|Balance, June 30, 2000 (As Restated *)                                                                                   |  | $              | 149 |                            | $ | 137,603 |                |  | $ | (1,239              | ) |  | $                                             | (100,004 | ) |       | $ | (252    | ) |  | $ | 36,257   |  
|Issuance of 273,584 shares of common stock                                                                               |  |                | 3   |                            |   | 345     |                |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | 348      |  
|Comprehensive loss, net of tax:                                                                                          |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Net loss (As Restated *)                                                                                                 |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               | (205,290 | ) |       |   |        |   |  |   | (205,290 | )
|Foreign currency translation adjustments                                                                                 |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               |         |   |       |   | 266     |   |  |   | 266      |  
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Comprehensive loss (As Restated*)                                                                                        |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   | (205,024 | )
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Balance, June 30, 2001 (As Restated *)                                                                                   |  |                | 152 |                            |   | 137,948 |                |  |   | (1,239              | ) |  |                                               | (305,294 | ) |       |   | 14      |   |  |   | (168,419 | )
|Issuance of 751,175 shares of common stock                                                                               |  |                | 7   |                            |   | 449     |                |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | 456      |  
|Fair value of options issued to non-employee                                                                             |  |                |    |                            |   | 73      |                |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | 73       |  
|Comprehensive loss, net of tax:                                                                                          |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Net loss (As Restated *)                                                                                                 |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               | (48,164  | ) |       |   |        |   |  |   | (48,164  | )
|Foreign currency translation adjustments                                                                                 |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   | 10,302  |   |  |   | 10,302   |  
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Comprehensive loss (As Restated*)                                                                                        |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               |         |   |       |   |         |   |  |   | (37,862  | )
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Balance, June 30, 2002 (As restated *)                                                                                   |  |                | 159 |                            |   | 138,470 |                |  |   | (1,239              | ) |  |                                               | (353,458 | ) |       |   | 10,316  |   |  |   | (205,752 | )
|Issuance of 664,272 shares of common stock                                                                               |  |                | 7   |                            |   | 400     |                |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | 407      |  
|Non-cash stock compensation expense relating to stock option modification                                                |  |                |    |                            |   | 139     |                |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | 139      |  
|Accretion of redeemable nonconvertible participating preferred stock                                                     |  |                |    |                            |   | (3,604  | )              |  |   |                    |   |  |                                               |         |   |       |   |        |   |  |   | (3,604   | )
|Comprehensive income, net of tax:                                                                                        |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Net income                                                                                                               |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               | 8,966    |   |       |   |        |   |  |   | 8,966    |  
|Foreign currency translation adjustments                                                                                 |  |                |    |                            |   |        |                |  |   |                    |   |  |                                               |         |   |       |   | (242    | ) |  |   | (242     | )
|Recognition of foreign currency translation adjustments in conjunction with the disposition of Latin American operations |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   | (10,074 | ) |  |   | (10,074  | )
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Comprehensive loss                                                                                                       |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   | (1,350   | )
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  
|Balance at June 30, 2003                                                                                                 |  | $              | 166 |                            | $ | 135,405 |                |  | $ | (1,239              | ) |  | $                                             | (344,492 | ) |       | $ |        |   |  | $ | (210,160 | )
|                                                                                                                         |  |                |     |                            |   |         |                |  |   |                     |   |  |                                               |          |   |       |   |         |   |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



See accompanying notes



47



---

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

For The Years Ended June 30, 2003, 2002
and 2001



|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------- | - | ------- | ---- |  | - | -------- | -
|                                                                                          |  | 2003           |         |   | 2002            |   |         | 2001 | 
|                                                                                          |  | (in thousands) |        
|                                                                                          |  |                |         |   | (As Restated *) |  
|Cash flows from operating activities:                                                     |  |                |         |   |                 |   |         |     
|Net income (loss)                                                                         |  | $              | 8,966   |   |                 | $ | (48,164 | )    |  | $ | (205,290 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities  |  |                |         |   |                 |   |         |      |  |   |          |  
|Non-cash portion of restructuring and other                                               |  |                | (1,421  | ) |                 |   | (718    | )    |  |   | 4,092    |  
|Non-cash portion of contract termination charges                                          |  |                |        |   |                 |   | (107    | )    |  |   | 8,086    |  
|Non-cash asset impairment charges                                                         |  |                |        |   |                 |   |        |      |  |   | 94,353   |  
|Non-cash portion of gain on disposal of Latin American operations                         |  |                | (13,732 | ) |                 |   |        |      |  |   |         |  
|Non-cash portion of loss on disposition of clinic operations                              |  |                |        |   |                 |   |        |      |  |   | 9,374    |  
|Cumulative effect of change in accounting principle                                       |  |                |        |   |                 |   | 49,513  |      |  |   |         |  
|Depreciation and amortization                                                             |  |                | 13,313  |   |                 |   | 16,210  |      |  |   | 29,161   |  
|Gain on sale of property and equipment                                                    |  |                | (540    | ) |                 |   | (285    | )    |  |   | (427     | )
|Provision for doubtful accounts                                                           |  |                | 85,046  |   |                 |   | 77,880  |      |  |   | 88,303   |  
|Deferred income taxes                                                                     |  |                |        |   |                 |   | (300    | )    |  |   | 950      |  
|Earnings (losses) of minority shareholders                                                |  |                | 1,507   |   |                 |   | 750     |      |  |   | (705     | )
|Amortization of deferred financing costs                                                  |  |                | 2,038   |   |                 |   | 726     |      |  |   | 946      |  
|Amortization of debt discount                                                             |  |                | 26      |   |                 |   | 26      |      |  |   | 26       |  
|Non-cash charge related to joint venture                                                  |  |                |        |   |                 |   |        |      |  |   | 4,045    |  
|Non-cash stock compensation expense                                                       |  |                |        |   |                 |   | 73      |      |  |   |         |  
|Other                                                                                     |  |                | (176    | ) |                 |   | (8      | )    |  |   | 7        |  
|Change in assets and liabilities                                                         |  |                |         |   |                 |   |         |      |  |   |          |  
|Increase in accounts receivable                                                           |  |                | (81,589 | ) |                 |   | (73,771 | )    |  |   | (70,707  | )
|Decrease in inventories                                                                   |  |                | 656     |   |                 |   | 948     |      |  |   | 5,811    |  
|(Increase) decrease in prepaid expenses and other                                         |  |                | (476    | ) |                 |   | (2,792  | )    |  |   | 1,505    |  
|(Increase) decrease in insurance deposits                                                 |  |                | 291     |   |                 |   | (4,492  | )    |  |   | (2,966   | )
|Decrease in other assets                                                                  |  |                | 126     |   |                 |   | 1,871   |      |  |   | 4,080    |  
|Increase (decrease) in accounts payable                                                   |  |                | 1,545   |   |                 |   | 1,453   |      |  |   | (2,714   | )
|Increase (decrease) in accrued liabilities and other liabilities                          |  |                | (3,342  | ) |                 |   | (9,881  | )    |  |   | 39,062   |  
|Increase (decrease) in deferred revenue                                                   |  |                | 908     |   |                 |   | 702     |      |  |   | (282     | )
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Net cash provided by operating activities                                                 |  |                | 13,146  |   |                 |   | 9,634   |      |  |   | 6,710    |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Cash flows from investing activities:                                                     |  |                |         |   |                 |   |         |      |  |   |          |  
|Capital expenditures                                                                      |  |                | (9,400  | ) |                 |   | (6,854  | )    |  |   | (5,774   | )
|Proceeds from the sale of property and equipment                                          |  |                | 1,818   |   |                 |   | 1,022   |      |  |   | 1,969    |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Net cash used in investing activities                                                     |  |                | (7,582  | ) |                 |   | (5,832  | )    |  |   | (3,805   | )
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Cash flows from financing activities:                                                     |  |                |         |   |                 |   |         |      |  |   |          |  
|Repayments on credit facility                                                             |  |                |        |   |                 |   | (1,263  | )    |  |   | (3,765   | )
|Repayment of debt and capital lease obligations                                           |  |                | (1,569  | ) |                 |   | (1,862  | )    |  |   | (2,773   | )
|Cash paid for debt modification costs                                                     |  |                | (1,583  | ) |                 |   |        |      |  |   |         |  
|Borrowings under capital lease obligations                                                |  |                |        |   |                 |   |        |      |  |   | 283      |  
|Distributions to minority shareholders                                                    |  |                | (914    | ) |                 |   | (501    | )    |  |   | (432     | )
|Issuance of common stock                                                                  |  |                | 407     |   |                 |   | 456     |      |  |   | 348      |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Net cash used in financing activities                                                     |  |                | (3,659  | ) |                 |   | (3,170  | )    |  |   | (6,339   | )
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Effect of currency exchange rate changes on cash                                          |  |                | (21     | ) |                 |   | 302     |      |  |   | 265      |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Increase (decrease) in cash                                                               |  |                | 1,884   |   |                 |   | 934     |      |  |   | (3,169   | )
|Cash, beginning of year                                                                   |  |                | 10,677  |   |                 |   | 9,743   |      |  |   | 12,912   |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  
|Cash, end of year                                                                         |  | $              | 12,561  |   |                 | $ | 10,677  |      |  | $ | 9,743    |  
|                                                                                          |  |                |         |   |                 |   |         |      |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



See accompanying notes





48



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|(1) | The Company and its Significant Accounting Policies
|--- | ---------------------------------------------------



Nature of Business and Operations



Rural/Metro Corporation, a Delaware corporation, and its subsidiaries (collectively, the Company) is a diversified emergency services company providing
medical transportation, fire protection and other related services in 26 states. In the United States, the Company provides emergency and non-emergency ambulance services to patients on both a fee-for-service basis and a non-refundable subscription
fee basis. Fire protection services are provided either under contracts with municipalities or fire districts, or on a subscription fee basis to individual homeowners or commercial property owners. Through September 27, 2002, the Company provided
urgent home medical care and ambulance services under capitated service arrangements in Latin America.



Use of Estimates



The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenue and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of discounts applicable to Medicare, Medicaid and other third-party payers,
the allowance for doubtful accounts, the valuation allowance for deferred tax assets, workers compensation and general liability claim reserves, fair values of reporting units for purposes of goodwill impairment testing and future cash flows
associated with long-lived assets. Actual results could differ from these estimates.



Principles of Consolidation



The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned subsidiary which it controls. All material intercompany accounts and transactions have been
eliminated. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis.



Revenue Recognition



Medical transportation and related services revenue includes emergency and non-emergency ambulance and alternative transportation service fees as well as
municipal subsidies and subscription fees. Domestic ambulance and alternative transportation service fees are recognized as services are provided and are recorded net of estimated discounts applicable to Medicare, Medicaid and other third-party
payers. Such discounts, which totaled $160.0 million in fiscal 2003, $148.2 million in fiscal 2002 and $145.9 million in fiscal 2001, are reflected as a reduction of gross revenues in the accompanying consolidated statement of operations. Ambulance
subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year.



Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees,
which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year.



The Company charges an enrollment fee for new subscribers under its fire protection service contracts. Such fees are
deferred and recognized over the estimated customer relationship period of nine years. Other revenue primarily consists of dispatch, fleet, billing, training and home health care service fees which are recognized when the services are provided.



49



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An allowance for doubtful accounts is based on historical collection trends, credit risk assessments
applicable to certain types of payers and other relevant information. A summary of activity in the Companys allowance for doubtful accounts during the fiscal years ended June 30, 2003, 2002 and 2001 is as follows (in thousands):



|                                                |  |          |         |   |                 |   |          |      |  |   |          |  
|----------------------------------------------- |  | -------- | ------- | - | --------------- | - | -------- | ---- |  | - | -------- | -
|                                                |  | June 30, |        
|                                                |  | 2003     |         |   | 2002            |   |          | 2001 | 
|                                                |  |          |         |   | (As Restated *) |  
|Balance at beginning of year                    |  |          | 37,966  |   |                 | $ | 60,812   |      |  | $ | 88,120   |  
|Provision for doubtful accounts - Domestic      |  |          | 85,046  |   |                 |   | 77,725   |      |  |   | 86,876   |  
|Provision for doubtful accounts - Latin America |  |          |        |   |                 |   | 155      |      |  |   | 1,427    |  
|Write-offs related to doubtful accounts         |  |          | (74,590 | ) |                 |   | (100,726 | )    |  |   | (115,611 | )
|                                                |  |          |         |   |                 |   |          |      |  |   |          |  
|Balance at end of year                          |  | $        | 48,422  |   |                 | $ | 37,966   |      |  | $ | 60,812   |  
|                                                |  |          |         |   |                 |   |          |      |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



Inventories



Inventories, consisting primarily of ambulance and fleet supplies, are stated at the lower of cost or market with cost determined on a first-in, first-out
basis.



Property and Equipment



Property and equipment is stated at cost, less accumulated depreciation, and
is depreciated over the estimated useful lives using the straight-line method. Equipment and vehicles are depreciated over three to ten years and buildings are depreciated over fifteen to thirty years. Property and equipment held under capital
leases is stated at the present value of minimum lease payments, net of accumulated amortization. These assets are amortized over the shorter of the lease term or the estimated useful life of the underlying assets using the straight-line method.
Major additions and improvements are capitalized; maintenance and repairs which do not improve or significantly extend the life of assets are expensed as incurred.



Impairment of Long-Lived Assets



The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable, by comparing the carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted cash flows are less than the related
carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate
commensurate with the risks involved.



Income Taxes



Income taxes are accounted for using the asset and
liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the
related benefits will not be realized.



Stock Compensation



The Company accounts for employee stock compensation
using the intrinsic value method specified by Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations (APB 25). The Company accounts for stock-based compensation arrangements with non-employees
in accordance with Emerging



50



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Issues Task Force Issue No 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling
Goods or Services.



Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock-Based Compensation defines a fair value based method of accounting for employee stock options or similar equity instruments but also allows an entity to continue to measure compensation cost related
to stock options issued to employees using the method of accounting prescribed by APB 25. Entities who elected to continue following APB 25 must make pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied.



The Company has elected to continue to account for its stock-based compensation plans under APB 25. As exercise prices have equaled the market price of the Companys common stock on the date of grant, stock compensation expense has not
been reflected in the accompanying consolidated statement of operations at the date of grant. Stock compensation expense has been recognized for certain modifications made to existing stock options at the time of such modifications. The Company has
computed, for pro forma disclosure purposes, the value of all option shares and Employee Stock Purchase Program (ESPP) discounts granted during fiscal years 2003, 2002 and 2001, using the Black-Scholes option pricing model with the following
weighted average assumptions:



|                                                    |  |                     |   |  |        |   |  |         |   |  |       |   |  |         |   |  |       |  
|--------------------------------------------------- |  | ------------------- | - |  | ------ | - |  | ------- | - |  | ----- | - |  | ------- | - |  | ----- | -
|                                                    |  | Year ended June 30, |  
|                                                    |  | 2003                |   |  | 2002   |   |  | 2001    |  
|                                                    |  | Options             |   |  | ESPP   |   |  | Options |   |  | ESPP  |   |  | Options |   |  | ESPP  |  
|Risk-free interest rate                             |  | 1.61                | % |  | 1.38   | % |  | 2.27    | % |  | 1.89  | % |  | 3.74    | % |  | 2.55  | %
|Expected dividend yield                             |  | 0.00                | % |  | 0.00   | % |  | 0.00    | % |  | 0.00  | % |  | 0.00    | % |  | 0.00  | %
|Expected lives in years (after vesting for options) |  | 1.21                |   |  | .50    |   |  | 2.72    |   |  | 0.50  |   |  | 1.35    |   |  | 0.50  |  
|Expected volatility                                 |  | 143.51              | % |  | 100.00 | % |  | 80.33   | % |  | 119.3 | % |  | 72.66   | % |  | 96.75 | %



The total value of
options granted and the ESPP share discount were estimated to be the following amounts, which would be amortized on the straight-line basis over the vesting period (in thousands):



|                                 |  |         |       |      |   |    
|-------------------------------- |  | ------- | ----- | ---- | - | ---
|                                 |  | Options |       | ESPP
|For the year ended June 30, 2003 |  | $       | 2,554 |      | $ | 102
|For the year ended June 30, 2002 |  | $       | 409   |      | $ | 77 
|For the year ended June 30, 2001 |  | $       | 1,134 |      | $ | 188



51



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If the Company had accounted for its stock-based compensation plans using a fair value based method of
accounting, the Companys pro forma net income (loss) and diluted earnings (loss) per share would have been as follows (in thousands, except per share amounts):



|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                                       |  | Year ended June 30, |       
|                                                                                                                                       |  | 2003                |        |   | 2002 |   |         | 2001 | 
|                                                                                                                                       |  | (As Restated *)     |       
|Net income (loss) applicable to common stock                                                                                           |  | $                   | 4,558  |   |      | $ | (48,164 | )    |  | $ | (205,290 | )
|Deduct: Stock based employee compensation determined under the fair value method for all awards applicable to common stock, net of
tax |  |                     | (1,605 | ) |      |   | (585    | )    |  |   | (875     | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|Pro forma net income (loss) applicable to common stock                                                                                 |  | $                   | 2,953  |   |      | $ | (48,749 | )    |  | $ | (206,165 | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|Income (loss) per share:                                                                                                               |  |                     |        |   |      |   |         |      |  |   |          |  
|Basic  As reported                                                                                                                    |  | $                   | 0.28   |   |      | $ | (3.17   | )    |  | $ | (13.92   | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|Basic  pro forma                                                                                                                      |  | $                   | 0.18   |   |      | $ | (3.19   | )    |  | $ | (13.98   | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|Diluted  As reported                                                                                                                  |  | $                   | 0.28   |   |      | $ | (3.17   | )    |  | $ | (13.92   | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  
|Diluted  pro forma                                                                                                                    |  | $                   | 0.18   |   |      | $ | (3.19   | )    |  | $ | (13.98   | )
|                                                                                                                                       |  |                     |        |   |      |   |         |      |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



The effects of applying SFAS 123 for providing pro forma disclosures for fiscal years 2003, 2002 and 2001 are not likely to be representative of the
effects on reported net income (loss) and diluted income (loss) per share for future years, because options vest over several years and additional awards are made each year.



52



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Earnings Per Share



The Company calculates income (loss) per share using the two-class method. Under the two-class method, net income or loss
for the period is allocated between common stock and the Companys Series B redeemable nonconvertible participating preferred stock on the basis of the weighted average number of common shares and common share equivalents outstanding during the
period. The per share amounts are also impacted by the accretion of the Series B shares to their redemption value as described in Note 14. Upon approval of the stockholders of an increase in authorized common shares and notice from the Company that
results in the settlement of the Series B shares in exchange for a total of 2,115,490 common shares, accretion will cease and use of the two-class method will no longer be required. Should the Company settle the Series B shares with common stock, it
will need to include a charge or a credit to income applicable to common stock in the period of settlement for the difference between the carrying value of the Series B shares and the fair value of the common shares issued in settlement.



A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) utilized in the basic and diluted income (loss) per share computations for the years ended June 30, 2003, 2002 and 2001 are as follows (in thousands, except per share amounts):



|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ------ |  | - | -------- | -
|                                                                                                                                                                                                          |  | Year ended June 30, |       
|                                                                                                                                                                                                          |  | 2003                |        |   | 2002 |   | 2001   | 
|                                                                                                                                                                                                          |  | (As Restated *)     |       
|Income (loss) from continuing operations before cumulative effect of change in accounting principle                                                                                                       |  | $                   | (3,366 | ) |      | $ | 370    |  | $ | (137,932 | )
|Less: (Income) loss from continuing operations before cumulative effect of change in accounting principle allocated to redeemable
nonconvertible participating preferred stock under the two-class method |  |                     | 302    |   |      |   |       |  |   |         |  
|Less: Accretion of redeemable nonconvertible participating preferred stock                                                                                                                                |  |                     | (3,604 | ) |      |   |       |  |   |         |  
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle                                                                            |  | $                   | (6,668 | ) |      | $ | 370    |  | $ | (137,932 | )
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|Average number of common shares outstanding  Basic                                                                                                                                                       |  |                     | 16,116 |   |      |   | 15,190 |  |   | 14,744   |  
|Add: Incremental common shares for stock options                                                                                                                                                          |  |                     |       |   |      |   | 583    |  |   |         |  
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|Average number of common shares outstanding - Diluted                                                                                                                                                     |  |                     | 16,116 |   |      |   | 15,773 |  |   | 14,744   |  
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|Income (loss) per share  Basic                                                                                                                                                                           |  |                     |        |   |      |   |        |  |   |          |  
|Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle                                                                            |  | $                   | (0.42  | ) |      | $ | 0.02   |  | $ | (9.35    | )
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  
|Income (loss) per share  Diluted                                                                                                                                                                         |  |                     |        |   |      |   |        |  |   |          |  
|Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle                                                                            |  | $                   | (0.42  | ) |      | $ | 0.02   |  | $ | (9.35    | )
|                                                                                                                                                                                                          |  |                     |        |   |      |   |        |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



53



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As a result of losses from continuing operations, approximately 1.4 million and 0.2 million option shares
for the years ended June 30, 2003 and 2001, respectively, which had exercise prices below the applicable market prices, were not included in the computation of diluted loss per share. Stock options with exercise prices above the applicable market
prices have also been excluded from the calculation of diluted loss per share. Such options totaled 4.8 million, 4.4 million and 4.4 million for the years ended June 30, 2003, 2002 and 2001, respectively.



Foreign Currency Translation



Prior to the disposition on September 27, 2002, the Companys Argentine
subsidiaries utilized the peso as their functional currency as their business was primarily transacted in pesos. Since 1991, the Argentine peso had been pegged to the U.S. dollar at an exchange rate of 1 to 1. In December 2001, the Argentine
government imposed exchange restrictions which severely limited cash conversions and withdrawals. When exchange houses reopened on January 11, 2002, the peso to dollar exchange rate closed at 1.7 pesos to the dollar.



In order to prepare the accompanying financial statements as of and for the
year ended June 30, 2002, the Company translated the balance sheet of its Argentine subsidiaries using an exchange rate of 3.9 pesos to 1 US dollar, the closing rate on June 30, 2002, while their statements of operations and cash flows through
September 27, 2002 were translated using the weighted average rate in effect during the respective period. As the liabilities of the Argentine subsidiaries exceeded their assets, the change in exchange rates resulted in a credit to accumulated other
comprehensive income (loss) in the consolidated balance sheet as of June 30, 2002.



Concentrations of Credit Risk



Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with federally-insured institutions and limits the amount of
credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographical dispersion.



Recently Issued Accounting Pronouncements



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies,
relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 is to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not
have a material impact on the Companys financial condition or results of operations. Note 17, Commitments and Contingencies, contains additional information with respect to the Companys guarantees and indemnifications.



In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46) to clarify when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest
entity or VIE. FIN 46 provides general guidance as to the definition of a VIE and requires that such VIEs be consolidated if a company absorbs the majority of the VIEs expected losses, or is entitled to receive a majority of the VIEs residual
returns, or both. FIN 46 is effective immediately for all new VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the consolidation provisions of FIN 46 must be applied for the first interim or annual reporting period
beginning after June 15, 2003 on either a retroactive or prospective basis.



The Company determined that its investment in San Diego Medical Services Enterprise, LLC, (SDMSE), the entity formed with respect to its public/private alliance with the City of San Diego, meets the definition of a
VIE as its economic interest in SDMSE is proportionately greater than its ownership interest and therefore, its investment in SDMSE should be consolidated under FIN 46. The Company had previously accounted for its investment in SDMSE using the
equity method. While consolidation of SDMSE did not impact the Companys previously reported net income (loss) or stockholders deficit, its consolidated financial statements of prior periods have been restated for comparative



54



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purposes as allowed by FIN 46. The Company does not believe that it has any other investments or contractual obligations that would require consolidation
under FIN 46.



In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore,
the issuer must classify them as liabilities. Such freestanding financial instruments include certain mandatorily redeemable financial instruments, obligations to repurchase the issuers equity shares by transferring assets, and certain
obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective July 1, 2003. The Company is in
the process of evaluating the impact of SFAS No. 150 on its consolidated financial statements.



Reclassifications of 2001 and 2000 Financial Information



Certain financial information relating to fiscal 2002 and 2001 has been reclassified to conform with the 2003 presentation. The results of the
Companys Latin American operations for the years ended June 30, 2002 and 2001 have been reclassified and are included in income (loss) from discontinued operations.



|(2) | Restatement of Consolidated Financial Statements
|--- | ------------------------------------------------



The Company has restated its consolidated financial statements for the following:



Accounts Receivable: The Company determined that collections on accounts receivable relating to medical
transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful
accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused the Companys period-end allowance for doubtful accounts through March 31, 2003 to be understated and its accounts receivable overstated. The
Company determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for
doubtful accounts through March 31, 2003.



The Company
determined that its consolidated financial statements of prior years required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers is
reflected as a reduction of net revenue while the portion relating to uncollectible accounts is reflected as an adjustment to the provision for doubtful accounts. The after-tax effect of the related restatement adjustments increased the
Companys accumulated deficit as of June 30, 2000 by $58.0 million.



Enrollment Fees: The Company charges an enrollment fee for new subscribers under its fire protection service contracts. The Company previously recognized these enrollment fees at the time of billing but has
subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.



The Company determined that its consolidated financial statements of prior years required restatement as a result of this matter. The after-tax effect of
the related restatement adjustments increased the Companys deferred revenue and accumulated deficit as of June 30, 2000 by $1.3 million. The effect of the restatement adjustments on the Companys operating income (loss) in fiscal 2002 and
2001 was immaterial.



San Diego Medical Services Enterprise
LLC: During fiscal 1998, the Company entered into an agreement with the City of San Diego to provide all emergency and non-emergency medical transport services and in connection therewith, San Diego Medical Services Enterprise LLC
(SDMSE) was formed. The Company owns 50% of SDMSE and appoints two of SDMSEs five directors. The City owns the remaining 50% and appoints the remaining three directors. A wholly owned subsidiary of the Company contracts with SDMSE
to provide operational and administrative support as well as billing and collection services.



55



---

During the fourth quarter of fiscal 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in
FIN 46. The Company determined that its investment in SDMSE meets the definition of a VIE as its economic interest in SDMSE is proportionately greater than its ownership interest and therefore, its investment in SDMSE should be consolidated under
FIN 46. The Company had previously accounted for its investment in SDMSE using the equity method. While the consolidation of SDMSE did not impact the Companys previously reported net income (loss) or stockholders deficit, the consolidated
financial statements of prior years have been restated for comparative purposes as allowed by FIN 46.



Earnings Per Share: The Company has restated its earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class
method. The two-class method is required as a result of the issuance in September 2002 of the Companys Series B redeemable nonconvertible participating preferred stock. The Series B shares, which the Company may elect to settle by issuance of
common shares before the December 31, 2004 mandatory redemption date (subject to approval by its shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common
dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may
share in earnings or losses as if such earnings or losses for the period had been distributed.



A summary of the financial statement amounts impacted by the restatement adjustments, accounting change and reclassification of discontinued operations is as follows. Net cash provided by operating activities as
previously reported was not impacted by the restatement adjustments.



56



---

|                                                                                                                                          |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------------------- | - | ------- | ----------- |  | - | --------------------- | - | ------------------------------ | - | ----- | ----------- |  | - | -------- | - |  | - | ------ |  | - | ------- | - |  | - | -------- | -
|                                                                                                                                          |  | As Previously Reported |          |   | Restatement Adjustments |   |         | As Restated |  |   | Accounting Change (D) |   | Less Latin American Operations |   |       | As Reported | 
|                                                                                                                                          |  | A                      |          |   | B                       |   |         | C           |  |   |                       |   |                               
|                                                                                                                                          |  | (in thousands)         |         
|Year ended June 30, 2003:                                                                                                                 |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Loss from continuing operations                                                                                                           |  | $                      | (3,366   | ) |                         | $ |        |             |  | $ |                      |   |                                | $ |      |             |  | $ | (3,366   | ) |  | $ |       |  | $ |        |   |  | $ | (3,366   | )
|Net income                                                                                                                                |  |                        | 8,966    |   |                         |   |        |             |  |   |                      |   |                                |   |      |             |  |   | 8,966    |   |  |   |       |  |   |        |   |  |   | 8,966    |  
|Basic loss from continuing operations applicable to common stock per share                                                                |  | $                      | (0.44    | ) |                         |   |        |             |  |   |                      |   |                                | $ | 0.02  |             |  | $ | (0.42    | ) |  |   |       |  |   |        |   |  | $ | (0.42    | )
|Basic income per share                                                                                                                    |  | $                      | 0.33     |   |                         |   |        |             |  |   |                      |   |                                | $ | (0.05 | )           |  | $ | 0.28     |   |  |   |       |  |   |        |   |  | $ | 0.28     |  
|Diluted loss from continuing operations applicable to common stock per share                                                              |  | $                      | (0.44    | ) |                         |   |        |             |  |   |                      |   |                                | $ | 0.02  |             |  | $ | (0.42    | ) |  |   |       |  |   |        |   |  | $ | (0.42    | )
|Diluted income per share                                                                                                                  |  | $                      | 0.33     |   |                         |   |        |             |  |   |                      |   |                                | $ | (0.05 | )           |  | $ | 0.28     |   |  |   |       |  |   |        |   |  | $ | 0.28     |  
|                                                                                                                                          |  |                        |          |   |                         |   |         |            
|Year ended June 30, 2002:                                                                                                                 |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                      | 497,038  |   |                         | $ | (1,669  | )           |  | $ |                      |   |                                | $ |      |             |  | $ | 495,369  |   |  | $ | 19,005 |  | $ | (25,394 | ) |  | $ | 488,980  |  
|Provision for doubtful accounts                                                                                                           |  |                        | 69,900   |   |                         |   | 871     |             |  |   |                      |   |                                |   |      |             |  |   | 70,771   |   |  |   | 7,109  |  |   | (155    | ) |  |   | 77,725   |  
|Operating income                                                                                                                          |  |                        | 26,806   |   |                         |   | (2,540  | )           |  |   |                      |   |                                |   |      |             |  |   | 24,266   |   |  |   | 732    |  |   | (1,588  | ) |  |   | 23,410   |  
|Income from continuing operations before cumulative effect of change in accounting principle                                              |  |                        | 3,889    |   |                         |   | (2,540  | )           |  |   |                      |   |                                |   |      |             |  |   | 1,349    |   |  |   |       |  |   | (979    | ) |  |   | 370      |  
|Net loss                                                                                                                                  |  |                        | (45,624  | ) |                         |   | (2,540  | )           |  |   |                      |   |                                |   |      |             |  |   | (48,164  | ) |  |   |       |  |   |        |   |  |   | (48,164  | )
|Basic income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per
share   |  | $                      | 0.26     |   |                         | $ | (0.17   | )           |  | $ |                      |   |                                | $ |      |             |  | $ | 0.09     |   |  | $ |       |  | $ | (0.07   | ) |  | $ | 0.02     |  
|Basic loss per share                                                                                                                      |  | $                      | (3.00    | ) |                         | $ | (0.17   | )           |  | $ |                      |   |                                | $ |      |             |  | $ | (3.17    | ) |  | $ |       |  | $ |        |   |  | $ | (3.17    | )
|Diluted income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per
share |  | $                      | 0.25     |   |                         | $ | (0.17   | )           |  | $ |                      |   |                                | $ |      |             |  | $ | 0.08     |   |  | $ |       |  | $ | (0.06   | ) |  | $ | 0.02     |  
|Diluted loss per share                                                                                                                    |  | $                      | (2.89    | ) |                         | $ | (0.16   | )           |  | $ |                      |   |                                | $ |      |             |  | $ | (3.05    | ) |  | $ |       |  | $ |        |   |  | $ | (3.05    | )
|                                                                                                                                          |  |                        |          |   |                         |   |         |            
|At June 30, 2002:                                                                                                                         |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                      | 237,438  |   |                         | $ | (39,147 | )           |  | $ |                      |   |                                | $ |      |             |  | $ | 198,291  |   |  | $ | 2,417  |  | $ |        |   |  | $ | 200,708  |  
|Deferred revenue                                                                                                                          |  |                        | 15,409   |   |                         |   |        |             |  |   | 1,286                 |   |                                |   |      |             |  |   | 16,695   |   |  |   |       |  |   |        |   |  |   | 16,695   |  
|Accumulated deficit                                                                                                                       |  |                        | (313,025 | ) |                         |   | (39,147 | )           |  |   | (1,286                | ) |                                |   |      |             |  |   | (353,458 | ) |  |   |       |  |   |        |   |  |   | (353,458 | )
|                                                                                                                                          |  |                        |          |   |                         |   |         |            
|Year ended June 30, 2001:                                                                                                                 |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Net revenue                                                                                                                               |  | $                      | 504,316  |   |                         | $ |        |             |  | $ |                      |   |                                | $ |      |             |  | $ | 504,316  |   |  | $ | 18,187 |  | $ | (43,089 | ) |  | $ | 479,414  |  
|Provision for doubtful accounts                                                                                                           |  |                        | 102,470  |   |                         |   | (21,441 | )           |  |   |                      |   |                                |   |      |             |  |   | 81,029   |   |  |   | 7,274  |  |   | (1,427  | ) |  |   | 86,876   |  
|Operating loss                                                                                                                            |  |                        | (192,453 | ) |                         |   | 21,441  |             |  |   |                      |   |                                |   |      |             |  |   | (171,012 | ) |  |   | 840    |  |   | 66,707  |   |  |   | (103,465 | )
|Loss from continuing operations                                                                                                           |  |                        | (226,731 | ) |                         |   | 21,441  |             |  |   |                      |   |                                |   |      |             |  |   | (205,290 | ) |  |   |       |  |   | 67,358  |   |  |   | (137,932 | )
|Net loss                                                                                                                                  |  |                        | (226,731 | ) |                         |   | 21,441  |             |  |   |                      |   |                                |   |      |             |  |   | (205,290 | ) |  |   |       |  |   |        |   |  |   | (205,290 | )
|Basic loss from continuing operations applicable to common stock per share                                                                |  | $                      | (15.38   | ) |                         | $ | 1.46    |             |  | $ |                      |   |                                | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ | 4.57    |   |  | $ | (9.35    | )
|Basic loss per share                                                                                                                      |  | $                      | (15.38   | ) |                         | $ | 1.46    |             |  | $ |                      |   |                                | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ |        |   |  | $ | (13.92   | )
|Diluted loss from continuing operations applicable to common stock per share                                                              |  | $                      | (15.38   | ) |                         | $ | 1.46    |             |  | $ |                      |   |                                | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ | 4.57    |   |  |   | (9.35    | )
|Diluted loss per share                                                                                                                    |  | $                      | (15.38   | ) |                         | $ | 1.46    |             |  | $ |                      |   |                                | $ |      |             |  | $ | (13.92   | ) |  | $ |       |  | $ |        |   |  | $ | (13.92   | )
|                                                                                                                                          |  |                        |          |   |                         |   |         |            
|At June 30, 2001:                                                                                                                         |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Total assets                                                                                                                              |  | $                      | 298,534  |   |                         | $ | (36,607 | )           |  | $ |                      |   |                                | $ |      |             |  | $ | 261,927  |   |  | $ | 2,079  |  | $ |        |   |  | $ | 264,006  |  
|Deferred revenue                                                                                                                          |  |                        | 14,707   |   |                         |   |        |             |  |   | 1,286                 |   |                                |   |      |             |  |   | 15,993   |   |  |   |       |  |   |        |   |  |   | 15,993   |  
|Accumulated deficit                                                                                                                       |  |                        | (267,401 | ) |                         |   | (36,607 | )           |  |   | (1,286                | ) |                                |   |      |             |  |   | (305,294 | ) |  |   |       |  |   |        |   |  |   | (305,294 | )
|                                                                                                                                          |  |                        |          |   |                         |   |         |            
|At June 30, 2000:                                                                                                                         |  |                        |          |   |                         |   |         |             |  |   |                       |   |                                |   |       |             |  |   |          |   |  |   |        |  |   |         |   |  |   |          |  
|Accumulated deficit                                                                                                                       |  | $                      | (40,670  | ) |                         | $ | (58,048 | )           |  | $ | (1,286                | ) |                                | $ |      |             |  | $ | (100,004 | ) |  | $ |       |  | $ |        |   |  | $ | (100,004 | )



Restatement Adjustments:



|A | To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payers and doubtful accounts.
|- | -----------------------------------------------------------------------------------------------------------------------



|B | To defer enrollment fees relating to new fire protection service contracts.
|- | ---------------------------------------------------------------------------



|C | To calculate income (loss) per share using the two-class method.
|- | ----------------------------------------------------------------



|D | Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.
|- | ---------------------------------------------------------------------------------------------------------



The restatement adjustments relating to medical transportation accounts receivable outlined above caused the Company to violate the minimum
tangible net worth covenant contained in its 2002 Amended Credit Facility. This situation also resulted in a delay in the Companys filing of its Quarterly Report on Form 10-Q for the three months ended March 31, 2003. Such delay caused the
Company to not be in compliance with the financial reporting covenants contained in the 2002 Amended Credit Facility as well as the indenture relating to the Senior Notes described in Note 12. As also described in Note 12, the Company negotiated a
further amendment to its credit facility effective September 30, 2003. As a result of such amendment, all previous instances of identified non-compliance with respect to the credit facility were permanently waived.



57



---

|(3) | Liquidity
|--- | ---------



During fiscal 2003, the Company generated net income of $9.0 million compared with net losses of $48.2 million in fiscal 2002 and $205.3 million in fiscal
2001. The net income for the year ended June 30, 2003 included a gain of $12.5 million relating to the disposal of the Companys Latin American operations as discussed in Note 4. The net loss in 2002 included a charge of $49.5 million relating
to the adoption effective July 1, 2002 of SFAS 142 as discussed in Note 7. The net loss in fiscal 2001 included asset impairment, restructuring and other similar charges totaling $122.0 million. The Companys operating activities provided cash
totaling $13.1 million in 2003, $9.6 million in 2002 and $6.7 million in 2001.



At June 30, 2003, the Company had cash of $12.6 million, debt of $306.6 million and a stockholders deficit of $208.9 million. The Companys long-term debt includes $149.9 million of 7 7/8% Senior Notes due
2008, $152.4 million outstanding under its credit facility due December 31, 2004, $3.7 million payable to a former joint venture partner and $0.6 million of capital lease obligations.



As discussed in Note 12, the Company was not in compliance with certain of the covenants contained in its revolving credit
facility at June 30, 2002. On September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders which, among other things, extended the maturity date of the facility from March 16, 2003 to December 31, 2004, waived
previous non-compliance, and required the issuance to the lenders of 211,549 shares of the Companys Series B redeemable nonconvertible participating preferred stock.



As also discussed in Note 12, the Company violated certain financial covenants as a result of the restatement of its
financial statements. Additionally, the restatement resulted in a delay in the filing of the Companys Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained
in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes. On September 26, 2003, the Company entered into the 2003 Amended Credit Facility with its lenders which, among other things, extended the maturity date of the
facility from December 31, 2004 to December 31, 2006, waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of the Companys Series C redeemable nonconvertible participating preferred stock.



The Companys ability to service its long-term debt, to remain in
compliance with the various restrictions and covenants contained in its debt agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is
subject to, among other things, future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.



If the Company fails to generate sufficient cash from operations, it may need
to raise additional equity or borrow additional funds to achieve its longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company.
Management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Companys operating and capital needs as well as enable it to maintain compliance with its various debt agreements
through June 30, 2004. To the extent that actual results or events differ from the Companys financial projections or business plans, its liquidity may be adversely impacted.



|(4) | Disposition of Latin American Operations
|--- | ----------------------------------------



Due to the deteriorating economic conditions and the continued devaluation of the local currency, the Company reviewed its strategic alternatives with
respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that it would benefit from focusing on its domestic operations. Effective September 27, 2002, the Company sold its Latin American operations
to local management in exchange for the assumption of such operations net liabilities. The gain on the disposition of the Companys Latin American operations totaled $12.5 million and is included in income from discontinued operations for
the year ended June 30, 2003. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including, among other things, accounts receivable of $0.6



58



---

million and accrued liabilities of $4.8 million) as well as the recognition of related cumulative translation adjustments of $10.1 million.



Medical transportation and related service revenue relating to the
Companys Latin American operations totaled $2.1 million, $23.9 million and $41.9 million for fiscal years 2003, 2002 and 2001, respectively. Fire and other revenue for these operations totaled $0.3 million, $1.5 million and $1.2 million for
fiscal years 2003, 2002 and 2001, respectively. The Companys Latin American operations generated a loss of $156,000, income of $1.0 million and a loss of $67.4 million for fiscal years 2003, 2002, and 2001 respectively. The loss in fiscal 2001
included $46.3 million of asset impairment charges and $9.4 million related to the loss on disposition of clinic operations described in Note 5. The results of operations of the Companys former Latin American operations have been classified as
discontinued operation in the accompanying consolidated statement of operations for fiscal years ended 2003, 2002 and 2001.



|(5) | Asset Impairments, Restructuring and Other Charges (Credits)
|--- | ------------------------------------------------------------



Asset Impairments



In connection with the budgeting process for fiscal 2002, which was completed in the fourth quarter of fiscal 2001, the Company analyzed each cost center
within its various service areas not identified for closure or downsizing to determine whether the associated long-lived assets (e.g., property, equipment and goodwill) would be recoverable from future operating cash flow. Cost centers represent
individual operating units within a given service area for which separately identifiable cash flow information is available. The Company performed this analysis as a result of its expectations of a challenging health care reimbursement environment
as well as anticipated increases in labor and insurance costs with respect to its domestic ambulance operations. The analysis with respect to the Companys Argentine operations included the impact of the deteriorating economic and political
environment as well as information developed by a third party concerning the marketability of these operations during fiscal 2001.



In order to assess recoverability, the Company estimated the net future cash flows for each cost center and then compared the resulting undiscounted
amounts to the carrying value of each cost centers long-lived assets. It should be noted that property and equipment balances are specifically identified with each cost center. Additionally, goodwill is specifically identified with each cost
center at the time of acquisition and, therefore, related allocations were not necessary for purposes of performing the impairment analysis.



For those cost centers where estimated future net cash flows on an undiscounted basis were less than the related carrying amounts of the long-lived
assets, an asset impairment was considered to exist. The Company measured the amount of the asset impairment for each such cost center by discounting its estimated future net cash flows using a discount rate of 18.5% and comparing the resulting
amount to the carrying value of its long-lived assets. Based upon this analysis, the Company determined that asset impairment charges approximating $94.4 million were required for cost centers within its domestic and Argentine ambulance operations.
The asset impairments were charged directly against the related asset balances. A summary of the related charge is as follows:



|                               |  |                |        |                               |   |       |  |   |       
|------------------------------ |  | -------------- | ------ | ----------------------------- | - | ----- |  | - | ------
|                               |  | Goodwill       |        | Property, Equipment and Other |   | Total
|                               |  | (in thousands)
|Domestic ambulance operations  |  | $              | 41,631 |                               | $ | 6,419 |  | $ | 48,050
|Argentine ambulance operations |  |                | 44,327 |                               |   | 1,976 |  |   | 46,303
|                               |  |                |        |                               |   |       |  |   |       
|Total                          |  | $              | 85,958 |                               | $ | 8,395 |  | $ | 94,353
|                               |  |                |        |                               |   |       |  |   |       



As a result of the
sale of the Companys Latin American operations in September 2002, the asset impairment charge with respect to the Companys Argentine ambulance operations is included in the loss from discontinued operations for the year ended June 30,
2001.



As discussed in Note 7, the Company changed its method
of accounting for goodwill effective July 1, 2001 including the manner in which goodwill impairments are assessed.



59



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Restructuring and Other



During the fourth quarter of fiscal 2001, the Company decided to close or downsize nine service areas and in connection
therewith, recorded restructuring charges as well as other related charges totaling $9.1 million. These charges included $1.5 million to cover severance costs associated with the termination of approximately 250 employees, lease termination costs of
$2.4 million, asset impairment charges for goodwill of $4.1 million and other exit costs of $1.1 million, respectively, related to the impacted service areas. The service areas selected for closure or downsizing generated revenue of $11.8 million,
operating income of $1.0 million and cash flow of $2.5 million in fiscal 2002. and revenue of $17.7 million, operating losses of $4.0 million and negative cash flow of $3.2 million in fiscal 2001.



The previously mentioned charge included accrued severance, lease termination
and other costs totaling $1.5 million relating to an under performing service area that the Company had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the
request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, the Company released $0.2 million of previously accrued lease termination costs relating to the
extension period to income. The operating environment in this service area improved and in November 2002, the Company was awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million originally recorded in 2001 was released
to income during fiscal 2003.



A summary of activity in the
Companys restructuring reserves is (in thousands):



|                         |  |                 |        |   |                         |   |        |                                |  |   |                 |   |  |       |        |   |  |   |         |  
|------------------------ |  | --------------- | ------ | - | ----------------------- | - | ------ | ------------------------------ |  | - | --------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                         |  | Severance Costs |        |   | Lease Termination Costs |   |        | Write-off of Intangible Assets |  |   | OtherExit Costs |   |  | Total |       
|Balance at June 30, 2000 |  | $               | 3,529  |   |                         | $ | 3,247  |                                |  | $ |                |   |  | $     | 1,356  |   |  | $ | 8,132   |  
|Fiscal 2001 charges      |  |                 | 1,475  |   |                         |   | 2,371  |                                |  |   | 4,092           |   |  |       | 1,153  |   |  |   | 9,091   |  
|Fiscal 2001 usage        |  |                 | (4,531 | ) |                         |   | (1,071 | )                              |  |   | (4,092          | ) |  |       | (1,360 | ) |  |   | (11,054 | )
|Adjustments              |  |                 | 1,361  |   |                         |   | (1,313 | )                              |  |   |                |   |  |       | (48    | ) |  |   |        |  
|                         |  |                 |        |   |                         |   |        |                                |  |   |                 |   |  |       |        |   |  |   |         |  
|Balance at June 30, 2001 |  | $               | 1,834  |   |                         | $ | 3,234  |                                |  | $ |                |   |  | $     | 1,101  |   |  | $ | 6,169   |  
|Fiscal 2002 usage        |  |                 | (1,025 | ) |                         |   | (1,172 | )                              |  |   |                |   |  |       | (951   | ) |  |   | (3,148  | )
|Adjustments              |  |                 | (52    | ) |                         |   | (548   | )                              |  |   |                |   |  |       | (118   | ) |  |   | (718    | )
|                         |  |                 |        |   |                         |   |        |                                |  |   |                 |   |  |       |        |   |  |   |         |  
|Balance at June 30, 2002 |  |                 | 757    |   |                         |   | 1,514  |                                |  |   |                |   |  |       | 32     |   |  |   | 2,303   |  
|Fiscal 2003 usage        |  |                 | (29    | ) |                         |   | (207   | )                              |  |   |                |   |  |       | (71    | ) |  |   | (307    | )
|Adjustments              |  |                 | (728   | ) |                         |   | (732   | )                              |  |   |                |   |  |       | 39     |   |  |   | (1,421  | )
|                         |  |                 |        |   |                         |   |        |                                |  |   |                 |   |  |       |        |   |  |   |         |  
|Balance at June 30, 2003 |  | $               |       |   |                         | $ | 575    |                                |  | $ |                |   |  | $     |       |   |  | $ | 575     |  
|                         |  |                 |        |   |                         |   |        |                                |  |   |                 |   |  |       |        |   |  |   |         |  



The restructuring reserve as of June
30, 2003 relates to lease termination costs for which payments will be made through December 2006.



Loss on Disposition of Clinic Operations



During fiscal 2001, the Company sold its Argentine clinic operations in exchange for a $3.0 million non-interest bearing note receivable. The note, which
required monthly principal payments of $25,000 through April 2011, was included in the disposition of the Latin American operations in September 2002. The sale resulted in a loss on disposition of $9.4 million, including the write-off of $9.3
million of related goodwill. The clinic operations generated revenue of $4.0 million, operating losses of $1.5 million and negative cash flow of $0.9 million in fiscal 2001. Results relating to the clinic operations are included in income ((loss)
from discontinued Latin American operations for the year ended June 30, 2001.



60



---

Contract Terminations and Related Asset Impairments



In November 2000, the Company learned that its exclusive 911 contract in
Lincoln, Nebraska would not be renewed effective December 31, 2000 and in connection therewith, recorded a contract termination charge of $5.2 million. This charge included asset impairments for related goodwill and equipment totaling $4.3 million
(the exclusive 911 contract was acquired in a purchase business combination in fiscal 1995), $0.8 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease terminations and other exit costs. The Lincoln
contract generated revenue of $4.7 million, operating income of $0.4 million and cash flow of $0.5 million in fiscal 2000, its last full year of operations.



In May 2001, the Company learned that its exclusive 911 contract in Arlington, Texas would not be renewed effective September 30, 2001 and in connection
therewith, recorded a contract termination charge of $4.1 million. This charge included asset impairments for related goodwill and equipment of $3.9 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1997),
$0.1 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease termination and other exit costs. The asset impairments were charged directly against the related assets. The Arlington contract generated
revenue of $8.3 million, operating income of $0.1 million and cash flow of $0.5 million in fiscal 2001 its last full year of operations.



|(6) | Property And Equipment
|--- | ----------------------



Property and equipment, including equipment held under capital leases, consisted of the following:



|                               |  |                |          |   |      |   |          |  
|------------------------------ |  | -------------- | -------- | - | ---- | - | -------- | -
|                               |  | June 30,       |         
|                               |  | 2003           |          |   | 2002 |  
|                               |  | (in thousands) |         
|Equipment                      |  | $              | 55,641   |   |      | $ | 55,739   |  
|Vehicles                       |  |                | 74,715   |   |      |   | 73,908   |  
|Land and buildings             |  |                | 16,715   |   |      |   | 16,788   |  
|Leasehold improvements         |  |                | 6,632    |   |      |   | 7,270    |  
|                               |  |                |          |   |      |   |          |  
|                               |  |                | 153,703  |   |      |   | 153,705  |  
|Less: Accumulated depreciation |  |                | (110,693 | ) |      |   | (105,173 | )
|                               |  |                |          |   |      |   |          |  
|                               |  | $              | 43,010   |   |      | $ | 48,532   |  
|                               |  |                |          |   |      |   |          |  



The Company had
vehicles and equipment with a gross carrying value of approximately $12.9 and $14.2 million at June 30, 2003 and 2002, respectively, under capital lease agreements. Accumulated depreciation on these assets totaled approximately $11.5 and $12.3
million at June 30, 2003 and 2002, respectively.



The Company
has pledged land, a building, leasehold improvements and equipment with a net book value of approximately $10.7 million, to secure certain of its obligations under its insurance and surety bonding programs. A summary of activity in the
Companys property and equipment balance is as follows:



|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                           |  | June 30,       |        
|                                           |  | 2003           |         |   | 2002 |   |         | 2001 | 
|                                           |  | (in thousands) |        
|Balance at beginning of year               |  | $              | 48,532  |   |      | $ | 57,999  |      |  | $ | 85,919  |  
|Depreciation expense                       |  |                | (13,110 | ) |      |   | (15,155 | )    |  |   | (21,809 | )
|Additions                                  |  |                | 9,400   |   |      |   | 6,854   |      |  |   | 5,774   |  
|Asset impairments                          |  |                |        |   |      |   |        |      |  |   | (8,502  | )
|Asset disposals                            |  |                | (1,278  | ) |      |   | (737    | )    |  |   | (1,643  | )
|Effect of Argentine peso devaluation       |  |                |        |   |      |   | (429    | )    |  |   |        |  
|Disposition of Latin American operations   |  |                | (534    | ) |      |   |        |      |  |   |        |  
|Disposition of Argentine clinic operations |  |                |        |   |      |   |        |      |  |   | (1,740  | )
|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Balance at end of year                     |  | $              | 43,010  |   |      | $ | 48,532  |      |  | $ | 57,999  |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |  



61



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|(7) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



In June 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets
(SFAS 142.) SFAS 141 superseded APB Opinion No. 16, Business Combinations. The provisions of SFAS 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; provide specific
criteria for the initial recognition and measurement of intangible assets apart from goodwill; and, require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142, certain intangible assets be reclassified into or out of goodwill based on certain criteria. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, and is effective for fiscal years beginning after
December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and
require that such assets be tested annually for impairment (and in interim periods if events or circumstances indicate that the related carrying amount may be impaired), require that reporting units be identified for purposes of assessing potential
impairments, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.



SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and
the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second
step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a
business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.



The Company adopted SFAS 142 effective July 1, 2001 and discontinued
amortization of goodwill as of that date. During the first quarter of fiscal 2002, the Company identified its various reporting units which consist of the individual cost centers within its Medical Transportation and Fire and Other operating
segments for which separately identifiable cash flow information is available. During the second quarter of fiscal 2002, the Company completed the first step impairment test as of July 1, 2001. Potential goodwill impairments were identified in
certain of these reporting units. During the fourth quarter of fiscal 2002, the Company completed the second step test and determined that all or a portion of the goodwill applicable to certain of its reporting units was impaired as of July 1, 2001
resulting in an aggregate charge of $49.5 million. The fair value of the reporting units was determined using the discounted cash flow method and a discount rate of 15.0%. This charge has been reflected in the accompanying consolidated statement of
operations as the cumulative effect of change in accounting principle. The Company has selected June 30 as the date on which it will perform its annual goodwill impairment test.



62



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The following table summarizes the Companys reported results along with adjusted amounts as if the
Company had adopted SFAS 142, and discontinued goodwill amortization, as of July 1, 2000 (in thousands, except per share amounts):



|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                     |  | For the Year Ended June 30, |      
|                                                                                                                     |  | 2003                        |       | 2002 |   |         | 2001 | 
|                                                                                                                     |  | As Restated *               |      
|Reported net income (loss) applicable to common stock before cumulative effect of change in accounting principle     |  | $                           | 4,558 |      | $ | 1,349   |      |  | $ | (205,290 | )
|Add back: Goodwill amortization                                                                                      |  |                             |      |      |   |        |      |  |   | 7,161    |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted net income (loss) applicable to common stock before the cumulative effect of change in accounting principle |  |                             | 4,558 |      |   | 1,349   |      |  |   | (198,129 | )
|Cumulative effect of change in accounting principle                                                                  |  |                             |      |      |   | (49,513 | )    |  |   |         |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted net income (loss) applicable to common stock                                                                |  | $                           | 4,558 |      | $ | (48,164 | )    |  | $ | (198,129 | )
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Basic income (loss) per share:                                                                                       |  |                             |       |      |   |         |      |  |   |          |  
|Reported income (loss) before the cumulative effect of change in accounting principle                                |  | $                           | 0.28  |      | $ | 0.09    |      |  | $ | (13.92   | )
|Goodwill amortization                                                                                                |  |                             |      |      |   |        |      |  |   | 0.49     |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted income (loss) before the cumulative effect of change in accounting principle                                |  | $                           | 0.28  |      |   | 0.09    |      |  |   | (13.43   | )
|Cumulative effect of change in accounting principle                                                                  |  |                             |      |      |   | (3.26   | )    |  |   |         |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted net income (loss)                                                                                           |  | $                           | 0.28  |      | $ | (3.17   | )    |  | $ | (13.43   | )
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Diluted income (loss) per share:                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Reported income (loss) before the cumulative effect of change in accounting principle                                |  | $                           | 0.28  |      | $ | 0.09    |      |  | $ | (13.92   | )
|Goodwill amortization                                                                                                |  |                             |      |      |   |        |      |  |   | 0.49     |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted income (loss) before the cumulative effect of change in accounting principle                                |  |                             | 0.28  |      |   | 0.09    |      |  |   | (13.43   | )
|Cumulative effect of change in accounting principle                                                                  |  |                             |      |      |   | (3.26   | )    |  |   |         |  
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  
|Adjusted net income (loss)                                                                                           |  | $                           | 0.28  |      | $ | (3.17   | )    |  | $ | (13.43   | )
|                                                                                                                     |  |                             |       |      |   |         |      |  |   |          |  



|* | Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | ------------------------------------------------------------------



63



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The changes in the carrying amount of goodwill for the year ended June 30, 2003 is as follows (in thousands):



|                                         |  |                                |         |   |                        |   |       |  |   |         |  
|---------------------------------------- |  | ------------------------------ | ------- | - | ---------------------- | - | ----- |  | - | ------- | -
|                                         |  | Medical Transportation Segment |         |   | Fire and Other Segment |   | Total | 
|Balance at June 30, 2001                 |  | $                              | 89,598  |   |                        | $ | 1,159 |  | $ | 90,757  |  
|Adoption of SFAS No. 142                 |  |                                | (49,513 | ) |                        |   |      |  |   | (49,513 | )
|                                         |  |                                |         |   |                        |   |       |  |   |         |  
|Balance at June 30, 2002                 |  |                                | 40,085  |   |                        |   | 1,159 |  |   | 41,244  |  
|Disposition of Latin American operations |  |                                | (77     | ) |                        |   |      |  |   | (77     | )
|                                         |  |                                |         |   |                        |   |       |  |   |         |  
|Balance at June 30, 2003                 |  | $                              | 40,008  |   |                        | $ | 1,159 |  | $ | 41,167  |  
|                                         |  |                                |         |   |                        |   |       |  |   |         |  



The changes in the carrying amount of
other intangible assets, primarily non-compete agreements relating to prior business combinations which are included in other assets on the consolidated balance sheet, during fiscal 2003 and 2002 are as follows (in thousands):



|                             |  |          |       |   |      |   |        |  
|---------------------------- |  | -------- | ----- | - | ---- | - | ------ | -
|                             |  | June 30, |      
|                             |  | 2003     |       |   | 2002 |  
|Balance at beginning of year |  | $        | 600   |   |      | $ | 1,654  |  
|Additions                    |  |          | 1,065 |   |      |   |       |  
|Amortization                 |  |          | (203  | ) |      |   | (1,054 | )
|                             |  |          |       |   |      |   |        |  
|Balance at end of year       |  | $        | 1,462 |   |      | $ | 600    |  
|                             |  |          |       |   |      |   |        |  



Amortization of other
intangible assets for each of the fiscal years ending June 30, are as follows (in thousands):



|           |  |   |      
|---------- |  | - | -----
|2004       |  | $ | 310  
|2005       |  |   | 302  
|2006       |  |   | 277  
|2007       |  |   | 277  
|2008       |  |   | 168  
|Thereafter |  |   | 128  
|           |  |   |      
|           |  | $ | 1,462
|           |  |   |      



|(8) | Joint Venture
|--- | -------------



During fiscal 1998, the Company entered into a joint venture to provide non-emergency transport services in the Maryland, Washington, D.C. and northern
Virginia areas. The Company obtained a majority interest in the joint venture in exchange for a commitment to provide $8.0 million in funding for acquisitions by the joint venture in the greater Baltimore, Maryland and Washington, D.C. areas (which
commitment was fulfilled by June 30, 1998). The other party to the joint venture contributed the stock of two ambulance companies in exchange for his minority stake in the joint venture. The Company consolidated the joint venture for financial
reporting purposes.



The joint venture agreement allowed the
minority partner to put his interest in the joint venture to the Company. The agreement also allowed the Company the option to delay the purchase of the minority partners interest for a period of one year. During fiscal 2001, the minority
partner elected to exercise the put option and the Company exercised its right to delay purchasing the minority partners interest for one year. Based on the provisions of the joint venture agreement, the purchase price for the minority
partners interest approximated $5.1 million. The Company recorded a charge of approximately $4.0 million to other income (expense), net during fiscal 2001 relating to this agreement.



During the year ended June 30, 2002, the Company completed the purchase of
the minority partners interest in exchange for a note payable of approximately $5.1 million. The note bears interest at prime plus 2.25% (subject to a cap of 7.75%) and requires monthly principal and interest payments ranging from $70,000 to
$125,000 through December 2006. Additionally, any outstanding accrued interest is due at maturity. The Company reflected this transaction as an increase in long-term debt of $5.1 million offset by reductions in minority interest of $8.0 million and
other assets of $2.9 million.



64



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|(9) | Accrued Liabilities
|--- | -------------------



Accrued liabilities consist of the following (in thousands):



|                                            |  |             |        |      |   |       
|------------------------------------------- |  | ----------- | ------ | ---- | - | ------
|                                            |  | At June 30,
|                                            |  | 2003        |        | 2002
|Workers compensation claim reserves        |  | $           | 11,255 |      | $ | 15,924
|General liability claim reserves            |  |             | 13,935 |      |   | 15,433
|Accrued salaries, wages and related payroll |  |             | 11,433 |      |   | 10,678
|Accrued interest                            |  |             | 4,370  |      |   | 10,512
|Other accrued liabilities                   |  |             | 16,705 |      |   | 21,147
|                                            |  |             |        |      |   |       
|Total accrued liabilities                   |  | $           | 57,698 |      | $ | 73,694
|                                            |  |             |        |      |   |       



The decrease in other
accrued liabilities between 2003 and 2002 is primarily due to the disposal of the Companys Latin American operations. Additionally, the decrease in accrued interest is primarily related to approximately $6.8 million in accrued interest being
added to the balance of the credit facility in conjunction with the September 30, 2002 amendment to the credit facility described in Note 12.



|(10) | General Liability and Workers Compensation Programs
|---- | ----------------------------------------------------



The Company retains certain levels of exposure with respect to its general liability and workers compensation programs and purchases coverage from third
party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, the Company establishes reserves for claims, both reported and incurred but not reported, within its level of
retention based on currently available information as well as its historical claims experience.



The Company engages third-party administrators or TPAs to manage claims resulting from its general liability and workers compensation programs. The TPAs
establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. The Company periodically reviews the claim reserves
established by the TPAs and engages independent actuaries to assist with the evaluation of the adequacy of its reserves on an annual basis. The Company adjusts its claim reserves with an associated charge or credit to expense as new information on
the underlying claims is obtained.



General Liability: A
summary of activity in the Companys general liability claim reserves, which are included in accrued liabilities in the consolidated balance sheet, is as follows:



|                                             |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | June 30,       |       
|                                             |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                             |  | (in thousands) |       
|Balance at beginning of year                 |  | $              | 15,433 |   |      | $ | 19,715 |      |  | $ | 3,171  |  
|Provision charged to other operating expense |  |                | 4,506  |   |      |   | 2,442  |      |  |   | 22,326 |  
|Claim payments charged Against the reserve   |  |                | (6,004 | ) |      |   | (6,724 | )    |  |   | (5,782 | )
|                                             |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                       |  | $              | 13,935 |   |      | $ | 15,433 |      |  | $ | 19,715 |  
|                                             |  |                |        |   |      |   |        |      |  |   |        |  



The Company performed
a comprehensive review of information related to its historical settlement information and open claims during the third quarter of fiscal 2001. As a result of this review, the Company recorded a charge of $15.0 million for increases in its reserves
for reported claims as well as to establish reserves for claims incurred but not reported.



Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Companys retention limits. Cash deposits relating to the Companys general
liability program totaled $2.9



65



---

million at June 30, 2003 of which $1.7 million is included in prepaid expenses and other and $1.2 million is included in insurance deposits. Cash deposits
totaled $1.9 million at June 30, 2002 which are included in insurance deposits.



The Companys general liability policies corresponding with fiscal years 2001 and 2002 were issued by Legion Insurance Company (Legion). Legions obligations under such policies were reinsured by
an unrelated insurance carrier that was identified and approved by the Company. At the time the coverage was purchased, Legion was an A rated insurance carrier while the reinsurer was an A++ rated carrier. Under these policies,
Legions obligation (as well as that of its reinsurer) to pay covered losses commences once the Company satisfies its aggregate retention limits for the respective policy years. As of June 30, 2003, the Company had met its aggregate retention
limit with respect to the policies corresponding to fiscal 2001 and anticipates that it will meet its aggregate retention limit for the policies corresponding to fiscal 2002. Pursuant to these policies, Legion (and its reinsurer) is obligated to
fund all claim related payments in excess of the Companys retention limits.



On July 25, 2003, the Pennsylvania Insurance Department (the Department) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth
Court of Pennsylvania (the Court). Legions liquidation could put the Companys general liability insurance coverage for the previously mentioned policy years at risk; however, based upon information currently available, the
Company believes that proceeds from Legions reinsurer will be directly available to pay claims in excess of the Companys retention limits, notwithstanding the liquidation process. If the Court deems the Companys reinsurance to be a
general asset of Legion or if the reinsurer otherwise refuses to pay claims directly, then reinsurance proceeds to fund covered general liability losses in excess of the Companys retention limits may be substantially reduced, delayed or
unrecoverable. In such an event, the Company may be required to fund general liability losses applicable to these policy years in excess of its retention limits, to the extent that such losses are not covered by the applicable state guaranty funds.



Workers Compensation:A summary of activity in the
Companys workers compensation claim reserves, which are also included in accrued liabilities in the consolidated balance sheet, is as follows:



|                                                   |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | June 30,       |       
|                                                   |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                                   |  | (in thousands) |       
|Balance at beginning of year                       |  | $              | 15,924 |   |      | $ | 14,944 |      |  | $ | 11,315 |  
|Provision charged to payroll and employee benefits |  |                |       |   |      |   | 7,318  |      |  |   | 11,832 |  
|Claim payments charged against the claim reserve   |  |                | (4,669 | ) |      |   | (6,338 | )    |  |   | (8,203 | )
|                                                   |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                             |  | $              | 11,255 |   |      | $ | 15,924 |      |  | $ | 14,944 |  
|                                                   |  |                |        |   |      |   |        |      |  |   |        |  



Effective May 1, 2002,
the Company began fully insuring its workers compensation coverage and no longer retains any of the related obligations. The Company is, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a
result of this change in coverage, the Company no longer establishes reserves for claims incurred subsequent to May 1, 2003.



In connection with the Companys restructuring activities, an increase in the volume of workers compensation claims was noted. Provisions
charged to expense during fiscal 2002 included $2.0 million recorded in the fourth quarter to increase its claim reserves based on a review of claims experience. Provisions charged to expense during fiscal 2001 included $5.0 million in the third
quarter for increases in reserves for unreported claims based on updated information received from the Companys TPA.



Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Companys retention
limits. Additionally, the Company has also been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to the Companys workers compensation program totaled $6.8 million at
June 30, 2003 which are included in insurance deposits. Cash deposits totaled $9.2 million at June 30, 2002 of which $2.9 million is included in prepaid expenses and other and $6.3 million is included in insurance deposits.



66



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During fiscal years 1992 through 2001, the Company purchased certain portions of its workers
compensation coverage from Reliance Insurance Company (Reliance). At the time the Company purchased such coverage, Reliance was an A rated insurance company. In connection with this coverage, the Company provided Reliance with various
amounts and forms of collateral to secure its performance under the respective policies as was customary at the time. As of June 30, 2003, the Company had $3.0 million of cash on deposit with Reliance which is included in insurance deposits. The
Company has also provided Reliance with letters of credit and surety bonds totaling $6.4 million.



On October 3, 2003, the Department placed Reliance into liquidation. It is the Companys understanding that cash on deposit with Reliance will be
returned to the Company on or before the date that all related claims have been satisfied, so long as the Company has met its claim payment obligations within its retention limits under the related policies. Based on the information currently
available, the Company believes that the cash on deposit with Reliance is fully recoverable and will either be returned to the Company or used by the liquidator, with the Companys prior consent, to pay claims on its behalf. In the event that
the Company is unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliances liquidation could put the Companys workers
compensation insurance coverage at risk for the related policy years; however, based upon information currently available, the Company believes that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent
that such losses are not covered by either Reliance or the applicable state guaranty funds, the Company may be required to fund the related workers compensation claims for the applicable policy years.



During fiscal 2002, the Company purchased certain portions of its workers
compensation coverage from Legion. Legion required assurances that the Company would be able to fund its related retention obligations, which were estimated by Legion to approximate $6.2 million. The Company provided this assurance by purchasing a
deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual Indemnity), a Legion affiliate. That policy required the Company to deposit approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such
funds to satisfy the Companys retention obligations under the Legion policy. The Company funded these deposits on a monthly basis during the policy term. As of June 30, 2003, the Company had net deposits with respect to this coverage totaling
$3.3 million which are included in insurance deposits.



As
mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion rehabilitator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by
Mutual Indemnity for the benefit of individual insureds such as the Company. It is the Companys understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these
trust accounts and that no final agreement has yet been reached. The Company is actively participating in the Court proceedings to cause such a trust account mechanism to be created and to operate so as to fully cover all its deductible obligations
as originally intended and to return to the Company any remaining deposit balance once all related claims have been closed. Based on the information currently available, the Company believes that the amounts on deposit with Mutual Indemnity are
fully recoverable and will either be returned to the Company or used to pay claims on the Companys behalf. In the event that the Company is unable to access the funds on deposit with Mutual Indemnity, it may be required to fund the related
workers compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds.



|(11) | Other Charges and Credits
|---- | -------------------------



During the fiscal 2002 and 2001 the Company recorded the following other charges or credits (in thousands):



|                                  |  |                           |        |   |      |   |      
|--------------------------------- |  | ------------------------- | ------ | - | ---- | - | -----
|                                  |  | Fiscal Year EndedJune 30,
|                                  |  | 2002                      |        |   | 2001
|Argentine Operations              |  | $                         |       |   |      | $ | 8,512
|Supply Inventory                  |  |                           |       |   |      |   | 8,442
|Other Charges and Credits         |  |                           | (1,712 | ) |      |   | 3,079
|Paid Time Off for Field Personnel |  |                           | (1,300 | ) |      |   | 3,010
|Employee Medical Benefits         |  |                           |       |   |      |   | 5,429
|Amount Due from Former Owner      |  |                           |       |   |      |   | 962  
|Medicare/Medicaid Audits          |  |                           | (1,298 | ) |      |   | 1,300



67



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Argentine Operations



The Company recorded charges totaling $8.5 million related to asset write-offs and reserve adjustments. The Companys
Argentine subsidiaries had been effected by escalating political and economic instability as well as changes in local management during fiscal 2001. The charge was recorded in other operating expenses in the consolidated statement of operations.



Supply Inventory



Medical, fleet and fire supplies are maintained in a central warehouse,
numerous regional warehouses, and multiple stations, lockers and vehicles. A physical inventory of all locations at June 30, 2001 revealed a shortage from recorded levels. Shrinkage, obsolescence and losses due to service area closures accounted for
the shortage. The Company recorded a charge of $8.4 million to write-down its inventory balances to amounts determined by the physical inventory. The charge was recorded in other operating expenses in the consolidated statement of operations.



Other Charges and Credits



During the third quarter of fiscal 2002, the Company recorded the reversal
of $1.7 million of discretionary employee benefits accrued in calendar 2000 as a result of the Companys decision not to pay such benefits. The original charge, as well as the current year reversal, were reflected in payroll and employee
benefits in the consolidated statement of operations.



The
Company recorded charges totaling $3.1 million in fiscal 2001 for a number of items related to its domestic operations, the largest of which was a $0.7 million charge relating to administrative costs paid on behalf of the Companys employee
benefit plans. These charges were a result of adjustments to certain estimates for prepaid expenses, accrued liabilities and other items that were resolved in the fourth quarter of fiscal 2001.



Paid-Time-Off For Field Personnel



During the fourth quarter of fiscal 2002, the Company recorded a $1.3
million reduction in its paid-time-off accrual as a result of a change in the related policies. The reduction was recorded as a reduction of payroll and employee benefits in the consolidated statement of operations.



During the fourth quarter of fiscal 2001, the Company analyzed its
paid-time-off accruals and determined that its paid-time-off policy had been inconsistently applied in certain service areas. As a result of this analysis, the Company recorded a charge of $3.0 million to bring the liability into line with the
amount required under the related policies. This charge was recorded in payroll and employee benefits in the consolidated statement of operations.



Employee Medical Benefits



The Company self-insures its employee medical coverage. Based upon information obtained from its third party claims administrator in the fourth quarter of
fiscal 2001, the Company recorded a charge of $5.4 million to increase its reserve for incurred but not reported employee medical claims. The increased reserve was required as a result of continuing increases in healthcare costs, including
prescription drugs. The charge was reflected in payroll and employee benefits in the consolidated statement of operations.



Amount Due From Former Owner



In connection with a February 1998 acquisition, the seller indemnified the collection of certain accounts receivable. In connection with the settlement of
litigation involving the seller during the fourth quarter of fiscal 2001, the Company agreed to release the seller from his obligations under the indemnification. The Company recorded a charge of $1.0 million, which was reflected in other operating
expenses in the consolidated statement of operations, related to this settlement.



68



---

Medicare/Medicaid Audits



The Company recorded a charge of $1.3 million during the fourth quarter of fiscal 2001 for the expected settlement of a
Medicare audit of an acquired company for periods prior to the acquisition. This charge, which was reflected in other operating expenses in the consolidated statement of operations, was taken based upon information obtained during the fourth quarter
of fiscal 2001, which included correspondence with the Medicare intermediary. The $1.3 million charge was reversed in the fourth quarter of fiscal 2002 after the Company settled the audit for approximately $2,000.



|(12) | Long-Term Debt
|---- | --------------



Notes payable and capital lease obligations consisted of the following:



|                                                                                                           |  |                |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                                           |  | June 30,       |        
|                                                                                                           |  | 2003           |         |   | 2002 |  
|                                                                                                           |  | (in thousands) |        
|Credit facility due December 2004                                                                          |  | $              | 152,420 |   |      | $ | 144,369 |  
|7 7/8% Senior Notes due 2008, net of discount of $122 and $148, respectively                               |  |                | 149,877 |   |      |   | 149,852 |  
|Note payable to former joint venture partner (See Note 8)                                                  |  |                | 3,722   |   |      |   | 4,622   |  
|Capital lease obligations and other notes payable, at varying rates, from 6.0% to 12.75%, due through 2013 |  |                | 620     |   |      |   | 1,319   |  
|                                                                                                           |  |                |         |   |      |   |         |  
|                                                                                                           |  |                | 306,639 |   |      |   | 300,162 |  
|Less: Current maturities                                                                                   |  |                | (1,329  | ) |      |   | (1,633  | )
|                                                                                                           |  |                |         |   |      |   |         |  
|                                                                                                           |  | $              | 305,310 |   |      | $ | 298,529 |  
|                                                                                                           |  |                |         |   |      |   |         |  



Credit Facility



In March 1998, the Company entered into a $200 million
revolving credit facility that was originally scheduled to mature on March 16, 2003. The credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of the Companys domestic wholly-owned
current and future subsidiaries. Interest rates and availability under the credit facility depended on the Companys meeting certain financial covenants.



In December 1999, the Company was not in compliance with certain of the covenants contained in the original credit facility. The Company received a
series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required the Company to accrue additional interest expense at a rate of 2.0% per annum on the amount
outstanding under the credit facility, and required the Company to make unscheduled principal payments totaling $5.2 million.



Effective September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders pursuant to which, among other things, all prior
covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7% (8.8% at the date of the amendment), and unpaid additional interest and various fees and
expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million. Additionally, the financial covenants contained in the original agreement were revised to
levels that were consistent with the Companys business levels and outlook at that time. In consideration for the amendment, the Company paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of the Companys
Series B redeemable nonconvertible participating preferred stock described in Note 14.



The 2002 Amended Credit Facility was not considered to represent a significant modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B
shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being amortized over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling
$1.6



69



---

million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled
$3.6 million at June 30, 2003.



As a result of the restatement
discussed in Note 2 and the related increase in the Companys stockholders deficit, the Company was not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the
restatement also resulted in a delay in the filing of the Companys Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit
Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from
May 15, 2003, the original required filing date for the Form 10-Q.



The Company entered into the 2003 Amended Credit Facility dated September 26, 2003 with its lenders pursuant to which, among other things, all prior identified covenant violations were permanently waived, the maturity date of the facility
was extended to December 31, 2006, and the financial covenants contained in the September 30, 2002 amendment were revised to levels consistent with the Companys current business levels and outlook. The revised financial covenants include:
total debt leverage ratio (initially set at 6.88); minimum tangible net worth (initially set at $280.0 million deficit); fixed charge coverage ratio (initially set at 1.10); a limitation on annual capital expenditures (initially set at $11.0 million
per fiscal year); and, a limitation on annual operating lease expense equivalent to 3.10% of consolidated net revenue. The compliance levels for the first four covenants outlined above are set at varying levels as specified in the related agreement.
The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.



In consideration for the amendment, the Company paid certain of the lenders amendment fees totaling $0.5 million and issued certain of the lenders 283,979
shares of the Companys Series C redeemable nonconvertible participating preferred stock described in Note 14. The Company also made a $1.0 million principal payment related to asset sale proceeds as required under the September 2002 amendment
to the credit facility.



The 2003 Amended Credit Facility is
not considered to represent a substantial modification for financial reporting purposes as a result, the $0.5 million amendment fee and the estimated fair value of the Series C shares will be capitalized as debt issue costs and amortized to interest
expense over the term of the amended agreement. Professional fees and other related costs incurred in connection with the amendment will be expensed.



At June 30, 2003, the weighted average interest rate on credit facility borrowings was approximately 8.4%. At June 30, 2003 there was $152.4 million
outstanding on the credit facility as well as $3.5 million in letters of credit issued under the credit facility at that date.



7 7/8% Senior Notes Due 2008



In March 1998, the Company issued $150.0 million of its 7 7/8% Senior Notes due 2008 (the Senior Notes) under Rule 144A under the Securities Act of 1933,
as amended (Securities Act). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. The Company incurred expenses related to the offering of approximately $5.3 million and is amortizing these costs to interest expense
over the life of the Senior Notes. In April 1998, the Company filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration statement became effective on May 14, 1998. The Senior Notes
are general unsecured obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by substantially all of its domestic wholly-owned current and future subsidiaries (the Guarantors). The Senior Notes contain
certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.



70



---

The Company does not believe that the separate financial statements and related footnote disclosures
concerning the Guarantors provide any additional information that would be material to investors in making an investment decision. Consolidating financial information for the Company (the Parent), the Guarantors and the Companys remaining
subsidiaries (the Non-Guarantors) is as follows:



RURAL/METRO
CORPORATION



CONSOLIDATING BALANCE SHEET

As of June 30, 2003

(in
thousands)



|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|---------------------------------------------------------------------------------------------- |  | ------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | -------- | -
|                                                                                               |  | Parent |          |   | Guarantors |   |          | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|ASSETS                                                                                         |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Current assets:                                                                                |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Cash                                                                                           |  | $      |         |   |            | $ | 11,362   |                |  | $ | 1,199        |   |  | $     |         |   |  | $ | 12,561   |  
|Accounts receivable, net                                                                       |  |        |         |   |            |   | 49,502   |                |  |   | 10,926       |   |  |       |        |   |  |   | 60,428   |  
|Inventories                                                                                    |  |        |         |   |            |   | 11,504   |                |  |   |             |   |  |       |        |   |  |   | 11,504   |  
|Prepaid expenses and other                                                                     |  |        |          |   |            |   | 7,467    |                |  |   | 44           |   |  |       |        |   |  |   | 7,511    |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total current assets                                                                           |  |        |         |   |            |   | 79,835   |                |  |   | 12,169       |   |  |       |        |   |  |   | 92,004   |  
|Property and equipment, net                                                                    |  |        |         |   |            |   | 42,862   |                |  |   | 148          |   |  |       |        |   |  |   | 43,010   |  
|Goodwill                                                                                       |  |        |         |   |            |   | 41,167   |                |  |   |             |   |  |       |        |   |  |   | 41,167   |  
|Insurance deposits                                                                             |  |        |         |   |            |   | 7,937    |                |  |   |             |   |  |       |        |   |  |   | 7,937    |  
|Due from (to) affiliates                                                                       |  |        | 255,078  |   |            |   | (228,366 | )              |  |   | (26,712      | ) |  |       |        |   |  |   |         |  
|Other assets                                                                                   |  |        | 6,177    |   |            |   | 5,453    |                |  |   | 418          |   |  |       |        |   |  |   | 12,048   |  
|Investment in subsidiaries                                                                     |  |        | (157,533 | ) |            |   |         |                |  |   |             |   |  |       | 157,533 |   |  |   |         |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total assets                                                                                   |  | $      | 103,722  |   |            | $ | (51,112  | )              |  | $ | (13,977      | ) |  | $     | 157,533 |   |  | $ | 196,166  |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|LIABILITIES, MINORITY INTERESTS, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT) |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Current liabilities:                                                                           |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Accounts payable                                                                               |  | $      |         |   |            | $ | 12,087   |                |  | $ | 1,691        |   |  | $     |        |   |  | $ | 13,778   |  
|Accrued liabilities                                                                            |  |        | 3,791    |   |            |   | 53,643   |                |  |   | 264          |   |  |       |        |   |  |   | 57,698   |  
|Deferred revenue                                                                               |  |        |         |   |            |   | 17,603   |                |  |   |             |   |  |       |        |   |  |   | 17,603   |  
|Current portion of long-term debt                                                              |  |        |         |   |            |   | 1,329    |                |  |   |              |   |  |       |        |   |  |   | 1,329    |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total current liabilities                                                                      |  |        | 3,791    |   |            |   | 84,662   |                |  |   | 1,955        |   |  |       |        |   |  |   | 90,408   |  
|Long-term debt, net of current portion                                                         |  |        | 302,298  |   |            |   | 3,012    |                |  |   |             |   |  |       |        |   |  |   | 305,310  |  
|Other liabilities                                                                              |  |        |         |   |            |   | 181      |                |  |   |             |   |  |       |        |   |  |   | 181      |  
|Deferred income taxes                                                                          |  |        |         |   |            |   | 650      |                |  |   |              |   |  |       |        |   |  |   | 650      |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total liabilities                                                                              |  |        | 306,089  |   |            |   | 88,505   |                |  |   | 1,955        |   |  |       |        |   |  |   | 396,549  |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Minority interests                                                                             |  |        |         |   |            |   |         |                |  |   |              |   |  |       | 1,984   |   |  |   | 1,984    |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Series B redeemable nonconvertible participating preferred stock                               |  |        | 7,793    |   |            |   |         |                |  |   |             |   |  |       |        |   |  |   | 7,793    |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Stockholders equity (deficit):                                                                |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Common stock                                                                                   |  |        | 166      |   |            |   | 82       |                |  |   | 8            |   |  |       | (90     | ) |  |   | 166      |  
|Additional paid-in capital                                                                     |  |        | 135,405  |   |            |   | 54,622   |                |  |   | 20,168       |   |  |       | (74,790 | ) |  |   | 135,405  |  
|Treasury stock                                                                                 |  |        | (1,239   | ) |            |   |         |                |  |   |             |   |  |       |        |   |  |   | (1,239   | )
|Accumulated deficit                                                                            |  |        | (344,492 | ) |            |   | (194,321 | )              |  |   | (36,108      | ) |  |       | 230,429 |   |  |   | (344,492 | )
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total stockholders equity (deficit)                                                           |  |        | (210,160 | ) |            |   | (139,617 | )              |  |   | (15,932      | ) |  |       | 155,549 |   |  |   | (210,160 | )
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|                                                                                               |  | $      | 103,722  |   |            | $ | (51,112  | )              |  | $ | (13,977      | ) |  | $     | 157,533 |   |  | $ | 196,166  |  
|                                                                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  



71



---

RURAL/METRO CORPORATION



CONSOLIDATING BALANCE SHEET

As of June 30, 2002

(in thousands)

(As Restated *)



|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|------------------------------------------------------------------ |  | ------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | -------- | -
|                                                                   |  | Parent |          |   | Guarantors |   |          | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|ASSETS                                                             |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Current assets:                                                    |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Cash                                                               |  | $      |         |   |            | $ | 9,424    |                |  | $ | 1,253        |   |  | $     |        |   |  | $ | 10,677   |  
|Accounts receivable, net                                           |  |        |         |   |            |   | 54,432   |                |  |   | 10,029       |   |  |       |        |   |  |   | 64,461   |  
|Inventories                                                        |  |        |         |   |            |   | 12,178   |                |  |   | 42           |   |  |       |        |   |  |   | 12,220   |  
|Prepaid expenses and other                                         |  |        |         |   |            |   | 7,077    |                |  |   | 154          |   |  |       |        |   |  |   | 7,231    |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total current assets                                               |  |        |         |   |            |   | 83,111   |                |  |   | 11,478       |   |  |       |        |   |  |   | 94,589   |  
|Property and equipment, net                                        |  |        |         |   |            |   | 47,972   |                |  |   | 560          |   |  |       |        |   |  |   | 48,532   |  
|Goodwill                                                           |  |        |         |   |            |   | 41,167   |                |  |   | 77           |   |  |       |        |   |  |   | 41,244   |  
|Insurance deposits                                                 |  |        |         |   |            |   | 8,228    |                |  |   |             |   |  |       |        |   |  |   | 8,228    |  
|Due from (to) affiliates                                           |  |        | 266,471  |   |            |   | (212,236 | )              |  |   | (54,235      | ) |  |       |        |   |  |   |         |  
|Other assets                                                       |  |        | 3,031    |   |            |   | 2,794    |                |  |   | 2,290        |   |  |       |        |   |  |   | 8,115    |  
|Investment in subsidiaries                                         |  |        | (170,862 | ) |            |   |         |                |  |   |             |   |  |       | 170,862 |   |  |   |         |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|                                                                   |  | $      | 98,640   |   |            | $ | (28,964  | )              |  | $ | (39,830      | ) |  | $     | 170,862 |   |  | $ | 200,708  |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITY (DEFICIT) |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Current liabilities:                                               |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Accounts payable                                                   |  | $      |         |   |            | $ | 11,049   |                |  | $ | 2,213        |   |  |       |        |   |  | $ | 13,262   |  
|Accrued liabilities                                                |  |        | 10,171   |   |            |   | 61,280   |                |  |   | 2,243        |   |  |       |        |   |  |   | 73,694   |  
|Deferred revenue                                                   |  |        |         |   |            |   | 16,695   |                |  |   |             |   |  |       |        |   |  |   | 16,695   |  
|Current portion of long-term debt                                  |  |        |         |   |            |   | 1,620    |                |  |   | 13           |   |  |       |        |   |  |   | 1,633    |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total current liabilities                                          |  |        | 10,171   |   |            |   | 90,644   |                |  |   | 4,469        |   |  |       |        |   |  |   | 105,284  |  
|Long-term debt, net of current portion                             |  |        | 294,221  |   |            |   | 4,308    |                |  |   |             |   |  |       |        |   |  |   | 298,529  |  
|Other liabilities                                                  |  |        |         |   |            |   | 477      |                |  |   |             |   |  |       |        |   |  |   | 477      |  
|Deferred income taxes                                              |  |        |         |   |            |   | 1,814    |                |  |   | (1,164       | ) |  |       |        |   |  |   | 650      |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total liabilities                                                  |  |        | 304,392  |   |            |   | 97,243   |                |  |   | 3,305        |   |  |       |        |   |  |   | 404,940  |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Minority interests                                                 |  |        |         |   |            |   |         |                |  |   |             |   |  |       | 1,520   |   |  |   | 1,520    |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Stockholders equity (deficit):                                    |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Common stock                                                       |  |        | 159      |   |            |   | 82       |                |  |   | 17           |   |  |       | (99     | ) |  |   | 159      |  
|Additional paid-in capital                                         |  |        | 138,470  |   |            |   | 54,622   |                |  |   | 34,962       |   |  |       | (89,584 | ) |  |   | 138,470  |  
|Treasury stock                                                     |  |        | (1,239   | ) |            |   |         |                |  |   |             |   |  |       |        |   |  |   | (1,239   | )
|Accumulated deficit                                                |  |        | (353,458 | ) |            |   | (180,911 | )              |  |   | (88,430      | ) |  |       | 269,341 |   |  |   | (353,458 | )
|Accumulated other comprehensive income (loss)                      |  |        | 10,316   |   |            |   |         |                |  |   | 10,316       |   |  |       | (10,316 | ) |  |   | 10,316   |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total stockholders equity (deficit)                               |  |        | (205,752 | ) |            |   | (126,207 | )              |  |   | (43,135      | ) |  |       | 169,342 |   |  |   | (205,752 | )
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  
|                                                                   |  | $      | 98,640   |   |            | $ | (28,964  | )              |  | $ | (39,830      | ) |  | $     | 170,862 |   |  | $ | 200,708  |  
|                                                                   |  |        |          |   |            |   |          |                |  |   |              |   |  |       |         |   |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



72



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2003

(in thousands)



|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                   |  | Parent |         |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|Net revenue                                                                        |  | $      |        |   |            | $ | 485,052 |                |  | $ | 54,070       |   |  | $     | (18,645 | ) |  | $ | 520,477 |  
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Operating expenses:                                                                |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Payroll and employee benefits                                                      |  |        |        |   |            |   | 277,458 |                |  |   | 6,563        |   |  |       |        |   |  |   | 284,021 |  
|Provision for doubtful accounts                                                    |  |        |        |   |            |   | 74,320  |                |  |   | 10,726       |   |  |       |        |   |  |   | 85,046  |  
|Depreciation and amortization                                                      |  |        |        |   |            |   | 13,121  |                |  |   | 168          |   |  |       |        |   |  |   | 13,289  |  
|Other operating expenses                                                           |  |        | 1,603   |   |            |   | 97,301  |                |  |   | 33,276       |   |  |       | (18,645 | ) |  |   | 113,535 |  
|Restructuring and other                                                            |  |        |        |   |            |   | (1,401  | )              |  |   | (20          | ) |  |       |        |   |  |   | (1,421  | )
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Total operating expenses                                                           |  |        | 1,603   |   |            |   | 460,799 |                |  |   | 50,713       |   |  |       | (18,645 | ) |  |   | 494,470 |  
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income (loss)                                                            |  |        | (1,603  | ) |            |   | 24,253  |                |  |   | 3,357        |   |  |       |        |   |  |   | 26,007  |  
|Income from wholly-owned subsidiaries                                              |  |        | 37,224  |   |            |   | 12,488  |                |  |   |             |   |  |       | (49,712 | ) |  |   |        |  
|Interest expense                                                                   |  |        | (26,655 | ) |            |   | (690    | )              |  |   | (667         | ) |  |       |        |   |  |   | (28,012 | )
|Interest income                                                                    |  |        |        |   |            |   | 192     |                |  |   | 5            |   |  |       |        |   |  |   | 197     |  
|Other income (expense), net                                                        |  |        |        |   |            |   | 24      |                |  |   | 122          |   |  |       |        |   |  |   | 146     |  
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  |        | 8,966   |   |            |   | 36,267  |                |  |   | 2,817        |   |  |       | (49,712 | ) |  |   | (1,662  | )
|Income tax provision                                                               |  |        |        |   |            |   | (197    | )              |  |   |             |   |  |       |        |   |  |   | (197    | )
|Minority interests                                                                 |  |        |        |   |            |   |        |                |  |   |             |   |  |       | (1,507  | ) |  |   | (1,507  | )
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) from continuing operations                                           |  |        | 8,966   |   |            |   | 36,070  |                |  |   | 2,817        |   |  |       | (51,219 | ) |  |   | (3,366  | )
|Income (loss) from discontinued operations                                         |  |        |        |   |            |   |        |                |  |   | (156         | ) |  |       | 12,488  |   |  |   | 12,332  |  
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                                                  |  | $      | 8,966   |   |            | $ | 36,070  |                |  | $ | 2,661        |   |  | $     | (38,731 | ) |  | $ | 8,966   |  
|                                                                                   |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  



73



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2002

(in thousands)

(As Restated*)



|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                                                                        |  | Parent |         |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|Net revenue                                                                                                                             |  | $      |        |   |            | $ | 458,281 |                |  | $ | 46,672       |   |  | $     | (15,973 | ) |  | $ | 488,980 |  
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Operating expenses:                                                                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Payroll and employee benefits                                                                                                           |  |        |        |   |            |   | 261,686 |                |  |   | 7,437        |   |  |       |        |   |  |   | 269,123 |  
|Provision for doubtful accounts                                                                                                         |  |        |        |   |            |   | 69,964  |                |  |   | 7,761        |   |  |       |        |   |  |   | 77,725  |  
|Depreciation and amortization                                                                                                           |  |        |        |   |            |   | 15,128  |                |  |   | 1,139        |   |  |       |        |   |  |   | 16,267  |  
|Other operating expenses                                                                                                                |  |        |        |   |            |   | 90,167  |                |  |   | 29,086       |   |  |       | (15,973 | ) |  |   | 103,280 |  
|Contract termination costs and related asset impairment                                                                                 |  |        |         |   |            |   | (7      | )              |  |   | (100         | ) |  |       |         |   |  |   | (107    | )
|Restructuring and other                                                                                                                 |  |        |        |   |            |   | (718    | )              |  |   |             |   |  |       |        |   |  |   | (718    | )
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Total operating expenses                                                                                                                |  |        |        |   |            |   | 436,220 |                |  |   | 45,323       |   |  |       | (15,973 | ) |  |   | 465,570 |  
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Operating income                                                                                                                        |  |        |        |   |            |   | 22,061  |                |  |   | 1,349        |   |  |       |        |   |  |   | 23,410  |  
|Income from wholly-owned subsidiaries                                                                                                   |  |        | 24,812  |   |            |   |        |                |  |   |             |   |  |       | (24,812 | ) |  |   |        |  
|Interest expense                                                                                                                        |  |        | (23,463 | ) |            |   | (1,029  | )              |  |   | (970         | ) |  |       |        |   |  |   | (25,462 | )
|Interest income                                                                                                                         |  |        |        |   |            |   | 625     |                |  |   | 19           |   |  |       |        |   |  |   | 644     |  
|Other income (expense), net                                                                                                             |  |        |        |   |            |   | 8       |                |  |   |             |   |  |       |        |   |  |   | 8       |  
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting
principle |  |        | 1,349   |   |            |   | 21,665  |                |  |   | 398          |   |  |       | (24,812 | ) |  |   | (1,400  | )
|Income tax benefit                                                                                                                      |  |        |        |   |            |   | 2,520   |                |  |   |             |   |  |       |        |   |  |   | 2,520   |  
|Minority interests                                                                                                                      |  |        |        |   |            |   |        |                |  |   |             |   |  |       | (750    | ) |  |   | (750    | )
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Income (loss) from continuing operations before cumulative effect of change in accounting principle                                     |  |        | 1,349   |   |            |   | 24,185  |                |  |   | 398          |   |  |       | (25,562 | ) |  |   | 370     |  
|Income from discontinued operations                                                                                                     |  |        |        |   |            |   |        |                |  |   | 979          |   |  |       |        |   |  |   | 979     |  
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net income before cumulative effect of change in accounting principle                                                                   |  |        | 1,349   |   |            |   | 24,185  |                |  |   | 1,377        |   |  |       | (25,562 | ) |  |   | 1,349   |  
|Cumulative effect of change in accounting principle                                                                                     |  |        | (49,513 | ) |            |   | (49,513 | )              |  |   |             |   |  |       | 49,513  |   |  |   | (49,513 | )
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                                                                                                       |  | $      | (48,164 | ) |            | $ | (25,328 | )              |  | $ | 1,377        |   |  | $     | 23,951  |   |  | $ | (48,164 | )
|                                                                                                                                        |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



74



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2001

(in thousands)

(As Restated *)



|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|--------------------------------------------------------------- |  | ------ | -------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | -------- | -
|                                                                |  | Parent |          |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|Net revenue                                                     |  | $      |         |   |            | $ | 444,960 |                |  | $ | 47,825       |   |  | $     | (13,371 | ) |  | $ | 479,414  |  
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Operating expenses:                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Payroll and employee benefits                                   |  |        |         |   |            |   | 261,179 |                |  |   | 10,797       |   |  |       |        |   |  |   | 271,976  |  
|Provision for doubtful accounts                                 |  |        |         |   |            |   | 74,812  |                |  |   | 12,064       |   |  |       |        |   |  |   | 86,876   |  
|Depreciation and amortization                                   |  |        |         |   |            |   | 24,116  |                |  |   | 1,625        |   |  |       |        |   |  |   | 25,741   |  
|Other operating expenses                                        |  |        |         |   |            |   | 117,644 |                |  |   | 27,616       |   |  |       | (13,371 | ) |  |   | 131,889  |  
|Asset impairment charges                                        |  |        |         |   |            |   | 32,338  |                |  |   | 15,712       |   |  |       |        |   |  |   | 48,050   |  
|Contract termination costs and related asset Impairment charges |  |        |         |   |            |   | 9,256   |                |  |   |             |   |  |       |        |   |  |   | 9,256    |  
|Restructuring and other                                         |  |        |         |   |            |   | 9,091   |                |  |   |             |   |  |       |        |   |  |   | 9,091    |  
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Total operating expenses                                        |  |        |         |   |            |   | 528,436 |                |  |   | 67,814       |   |  |       | (13,371 | ) |  |   | 582,879  |  
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Operating loss                                                  |  |        |         |   |            |   | (83,476 | )              |  |   | (19,989      | ) |  |       |        |   |  |   | (103,465 | )
|Loss from wholly-owned subsidiaries                             |  |        | (176,328 | ) |            |   |        |                |  |   |             |   |  |       | 176,328 |   |  |   |         |  
|Interest expense                                                |  |        | (28,962  | ) |            |   | (535    | )              |  |   | (1,127       | ) |  |       |        |   |  |   | (30,624  | )
|Interest income                                                 |  |        |         |   |            |   | 518     |                |  |   | 124          |   |  |       |        |   |  |   | 642      |  
|Other income (expense), net                                     |  |        |         |   |            |   | (4,053  | )              |  |   |             |   |  |       |        |   |  |   | (4,053   | )
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Loss from continuing operations before income taxes             |  |        | (205,290 | ) |            |   | (87,546 | )              |  |   | (20,992      | ) |  |       | 176,328 |   |  |   | (137,500 | )
|Income tax provision                                            |  |        |         |   |            |   | (1,136  | )              |  |   | (1           | ) |  |       |        |   |  |   | (1,137   | )
|Minority interests                                              |  |        |         |   |            |   |        |                |  |   |             |   |  |       | 705     |   |  |   | 705      |  
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Income (loss) from continuing operations                        |  |        | (205,290 | ) |            |   | (88,682 | )              |  |   | (20,993      | ) |  |       | 177,033 |   |  |   | (137,932 | )
|Loss from discontinued operations                               |  |        |         |   |            |   |        |                |  |   | (67,358      | ) |  |       |        |   |  |   | (67,358  | )
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  
|Net loss                                                        |  | $      | (205,290 | ) |            | $ | (88,682 | )              |  | $ | (88,351      | ) |  | $     | 177,033 |   |  | $ | (205,290 | )
|                                                                |  |        |          |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



75



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2003

(in thousands)



|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                     |  | Parent |         |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|Cash flows from operating activities:                                |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net income                                                           |  | $      | 8,966   |   |            | $ | 36,070  |                |  | $ | 2,661        |   |  | $     | (38,731 | ) |  | $ | 8,966   |  
|Adjustments to reconcile net income to cash provided by operations  |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Non-cash portion of restructuring and other                          |  |        |        |   |            |   | (1,401  | )              |  |   | (20          | ) |  |       |        |   |  |   | (1,421  | )
|Depreciation and amortization                                        |  |        |        |   |            |   | 13,131  |                |  |   | 182          |   |  |       |        |   |  |   | 13,313  |  
|Gain on sale of property and equipment                               |  |        |        |   |            |   | (406    | )              |  |   | (134         | ) |  |       |        |   |  |   | (540    | )
|Non-cash portion of gain on disposition of Latin American operations |  |        | 139     |   |            |   |        |                |  |   | (13,871      | ) |  |       |         |   |  |   | (13,732 | )
|Provision for doubtful accounts                                      |  |        |        |   |            |   | 74,320  |                |  |   | 10,726       |   |  |       |        |   |  |   | 85,046  |  
|Deferred income taxes                                                |  |        |        |   |            |   | (1,164  | )              |  |   | 1,164        |   |  |       |        |   |  |   |        |  
|Earnings of minority shareholder                                     |  |        |        |   |            |   |        |                |  |   |             |   |  |       | 1,507   |   |  |   | 1,507   |  
|Amortization of deferred financing costs                             |  |        | 2,038   |   |            |   |         |                |  |   |             |   |  |       |        |   |  |   | 2,038   |  
|Amortization of debt discount                                        |  |        | 26      |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 26      |  
|Other                                                                |  |        |        |   |            |   | (176    | )              |  |   |             |   |  |       |        |   |  |   | (176    | )
|Change in assets and liabilities                                    |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|(Increase) decrease in accounts receivable                           |  |        |        |   |            |   | (69,386 | )              |  |   | (12,203      | ) |  |       |        |   |  |   | (81,589 | )
|(Increase) decrease in inventories                                   |  |        |        |   |            |   | 674     |                |  |   | (18          | ) |  |       |        |   |  |   | 656     |  
|Increase in prepaid expenses and other                               |  |        |        |   |            |   | (391    | )              |  |   | (85          | ) |  |       |        |   |  |   | (476    | )
|Decrease in insurance deposits                                       |  |        |        |   |            |   | 291     |                |  |   |             |   |  |       |        |   |  |   | 291     |  
|(Increase) decrease in other assets                                  |  |        | 1,842   |   |            |   | (2,757  | )              |  |   | 1,041        |   |  |       |        |   |  |   | 126     |  
|(Increase) decrease in due to/from affiliates                        |  |        | (12,290 | ) |            |   | (33,194 | )              |  |   | 8,281        |   |  |       | 37,203  |   |  |   |        |  
|Increase in accounts payable                                         |  |        |        |   |            |   | 977     |                |  |   | 568          |   |  |       |        |   |  |   | 1,545   |  
|Increase (decrease) in accrued liabilities and other liabilities     |  |        | 476     |   |            |   | (6,532  | )              |  |   | 2,714        |   |  |       |        |   |  |   | (3,342  | )
|Increase in deferred revenue                                         |  |        |        |   |            |   | 908     |                |  |   |             |   |  |       |        |   |  |   | 908     |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash provided by operating activities                            |  |        | 1,197   |   |            |   | 10,964  |                |  |   | 1,006        |   |  |       | (21     | ) |  |   | 13,146  |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash flows from investing activities:                                |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Capital expenditures                                                 |  |        |        |   |            |   | (9,251  | )              |  |   | (149         | ) |  |       |        |   |  |   | (9,400  | )
|Proceeds from the sale of property and equipment                     |  |        |        |   |            |   | 1,780   |                |  |   | 38           |   |  |       |        |   |  |   | 1,818   |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash used in investing activities                                |  |        |        |   |            |   | (7,471  | )              |  |   | (111         | ) |  |       |        |   |  |   | (7,582  | )
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash flows from financing activities:                                |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Repayment of debt and capital lease obligations                      |  |        |        |   |            |   | (1,555  | )              |  |   | (14          | ) |  |       |        |   |  |   | (1,569  | )
|Cash paid for debt issuance costs                                    |  |        | (1,583  | ) |            |   |        |                |  |   |             |   |  |       |        |   |  |   | (1,583  | )
|Distributions to minority shareholders                               |  |        |        |   |            |   |        |                |  |   | (914         | ) |  |       |        |   |  |   | (914    | )
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Issuance of common stock                                             |  |        | 407     |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 407     |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash used in financing activities                                |  |        | (1,176  | ) |            |   | (1,555  | )              |  |   | (928         | ) |  |       |        |   |  |   | (3,659  | )
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Effect of currency exchange rate changes on cash                     |  |        | (21     | ) |            |   |        |                |  |   | (21          | ) |  |       | 21      |   |  |   | (21     | )
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Increase (decrease) in cash                                          |  |        |        |   |            |   | 1,938   |                |  |   | (54          | ) |  |       |        |   |  |   | 1,884   |  
|Cash, beginning of year                                              |  |        |        |   |            |   | 9,424   |                |  |   | 1,253        |   |  |       |        |   |  |   | 10,677  |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash, end of year                                                    |  | $      |        |   |            | $ | 11,362  |                |  | $ | 1,199        |   |  | $     |        |   |  | $ | 12,561  |  
|                                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  



76



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2002

(in thousands)

(As Restated*)



|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                      |  | Parent |         |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |        
|Cash flows from operating activities:                                                 |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net income (loss)                                                                     |  | $      | (48,164 | ) |            | $ | (25,338 | )              |  | $ | 1,377        |   |  | $     | 23,961  |   |  | $ | (48,164 | )
|Adjustments to reconcile net income (loss) to cash provided by (used in) operations  |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Non-cash portion of restructuring and other                                           |  |        |        |   |            |   | (725    | )              |  |   | (100         | ) |  |       |        |   |  |   | (825    | )
|Cumulative effect of change in accounting principle                                   |  |        |        |   |            |   | 49,513  |                |  |   |             |   |  |       |        |   |  |   | 49,513  |  
|Depreciation and amortization                                                         |  |        |        |   |            |   | 15,128  |                |  |   | 1,082        |   |  |       |        |   |  |   | 16,210  |  
|(Gain) loss on sale of property and equipment                                         |  |        |        |   |            |   | 152     |                |  |   | (437         | ) |  |       |        |   |  |   | (285    | )
|Provision for doubtful accounts                                                       |  |        |        |   |            |   | 69,964  |                |  |   | 7,916        |   |  |       |        |   |  |   | 77,880  |  
|Deferred income taxes                                                                 |  |        |        |   |            |   | (300    | )              |  |   |             |   |  |       |        |   |  |   | (300    | )
|Equity earnings net of distributions received                                         |  |        |        |   |            |   | 1       |                |  |   |             |   |  |       |        |   |  |   | 1       |  
|Earnings of minority shareholder                                                      |  |        |        |   |            |   |        |                |  |   |             |   |  |       | 750     |   |  |   | 750     |  
|Amortization of deferred financing costs                                              |  |        | 726     |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 726     |  
|Amortization of discount on Senior Notes                                              |  |        | 26      |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 26      |  
|Non-cash stock compensation expense                                                   |  |        | 73      |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 73      |  
|Other                                                                                 |  |        |        |   |            |   | (8      | )              |  |   |             |   |  |       |        |   |  |   | (8      | )
|Change in assets and liabilities                                                     |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|(Increase) decrease in accounts receivable                                            |  |        |        |   |            |   | (67,533 | )              |  |   | (6,238       | ) |  |       |        |   |  |   | (73,771 | )
|Decrease in inventories                                                               |  |        |        |   |            |   | 915     |                |  |   | 33           |   |  |       |        |   |  |   | 948     |  
|(Increase) decrease in prepaid expenses and other                                     |  |        | (51     | ) |            |   | (2,756  | )              |  |   | 15           |   |  |       |        |   |  |   | (2,792  | )
|Increase in insurance deposits                                                        |  |        |        |   |            |   | (4,492  | )              |  |   |             |   |  |       |        |   |  |   | (4,492  | )
|Increase in other assets                                                              |  |        | (819    | ) |            |   | 3,861   |                |  |   | (1,171       | ) |  |       |        |   |  |   | 1,871   |  
|(Increase) decrease in due to/from affiliates                                         |  |        | 46,114  |   |            |   | (19,723 | )              |  |   | (1,982       | ) |  |       | (24,409 | ) |  |   |        |  
|Increase (decrease) in accounts payable                                               |  |        |        |   |            |   | 1,571   |                |  |   | (118         | ) |  |       |        |   |  |   | 1,453   |  
|Increase (decrease) in accrued liabilities and other liabilities                      |  |        | 2,600   |   |            |   | (10,632 | )              |  |   | (1,849       | ) |  |       |        |   |  |   | (9,881  | )
|Increase in deferred revenue                                                          |  |        |        |   |            |   | 702     |                |  |   |             |   |  |       |        |   |  |   | 702     |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash provided by (used in) operating activities                                   |  |        | 505     |   |            |   | 10,299  |                |  |   | (1,472       | ) |  |       | 302     |   |  |   | 9,634   |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash flows from investing activities:                                                 |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Capital expenditures                                                                  |  |        |        |   |            |   | (6,360  | )              |  |   | (494         | ) |  |       |        |   |  |   | (6,854  | )
|Proceeds from the sale of property and equipment                                      |  |        |        |   |            |   | 422     |                |  |   | 600          |   |  |       |        |   |  |   | 1,022   |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash provided by (used in) investing activities                                   |  |        |        |   |            |   | (5,938  | )              |  |   | 106          |   |  |       |        |   |  |   | (5,832  | )
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash flows from financing activities:                                                 |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Repayments on credit facility                                                         |  |        | (1,263  | ) |            |   |        |                |  |   |             |   |  |       |        |   |  |   | (1,263  | )
|Repayment of debt and capital lease obligations                                       |  |        |        |   |            |   | (1,700  | )              |  |   | (162         | ) |  |       |        |   |  |   | (1,862  | )
|Distributions to minority shareholders                                                |  |        |        |   |            |   |        |                |  |   | (501         | ) |  |       |        |   |  |   | (501    | )
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Issuance of common stock                                                              |  |        | 456     |   |            |   |        |                |  |   |             |   |  |       |        |   |  |   | 456     |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Net cash used in financing activities                                                 |  |        | (807    | ) |            |   | (1,700  | )              |  |   | (663         | ) |  |       |        |   |  |   | (3,170  | )
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Effect of currency exchange rate changes on cash                                      |  |        | 302     |   |            |   |        |                |  |   | 302          |   |  |       | (302    | ) |  |   | 302     |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Increase (decrease) in cash                                                           |  |        |        |   |            |   | 2,661   |                |  |   | (1,727       | ) |  |       |        |   |  |   | 934     |  
|Cash, beginning of year                                                               |  |        |        |   |            |   | 6,763   |                |  |   | 2,980        |   |  |       |        |   |  |   | 9,743   |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  
|Cash, end of year                                                                     |  | $      |        |   |            | $ | 9,424   |                |  | $ | 1,253        |   |  | $     |        |   |  | $ | 10,677  |  
|                                                                                      |  |        |         |   |            |   |         |                |  |   |              |   |  |       |         |   |  |   |         |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



77



---

RURAL/METRO CORPORATION



CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2001

(in thousands)

(As Restated *)



|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|---------------------------------------------------------------------------- |  | ------ | -------- | - | ---------- | - | ------- | -------------- |  | - | ------------ | - |  | ----- | -------- | - |  | - | -------- | -
|                                                                             |  | Parent |          |   | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |   |  | Total |         
|Cash flows from operating activities                                         |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Net loss                                                                     |  | $      | (205,290 | ) |            | $ | (88,682 | )              |  | $ | (88,351      | ) |  | $     | 177,033  |   |  | $ | (205,290 | )
|Adjustments to reconcile net loss to cash provided by (used in) operations  |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Non-cash portion of restructuring and other                                  |  |        |         |   |            |   | 4,092   |                |  |   |             |   |  |       |         |   |  |   | 4,092    |  
|Non-cash portion of contract termination charges                             |  |        |         |   |            |   | 8,086   |                |  |   |             |   |  |       |         |   |  |   | 8,086    |  
|Non-cash asset impairment charge                                             |  |        |         |   |            |   | 32,339  |                |  |   | 62,014       |   |  |       |         |   |  |   | 94,353   |  
|Non-cash portion of loss on disposition of clinic operations                 |  |        |         |   |            |   |        |                |  |   | 9,374        |   |  |       |         |   |  |   | 9,374    |  
|Depreciation and amortization                                                |  |        |         |   |            |   | 24,116  |                |  |   | 5,045        |   |  |       |         |   |  |   | 29,161   |  
|Gain on sale of property and equipment                                       |  |        |         |   |            |   | (406    | )              |  |   | (21          | ) |  |       |         |   |  |   | (427     | )
|Provision for doubtful accounts                                              |  |        |         |   |            |   | 74,812  |                |  |   | 13,491       |   |  |       |         |   |  |   | 88,303   |  
|Deferred income taxes                                                        |  |        |         |   |            |   | 2,839   |                |  |   | (1,889       | ) |  |       |         |   |  |   | 950      |  
|Losses of minority shareholder                                               |  |        |         |   |            |   |        |                |  |   |             |   |  |       | (705     | ) |  |   | (705     | )
|Amortization of deferred financing costs                                     |  |        | 946      |   |            |   |        |                |  |   |             |   |  |       |         |   |  |   | 946      |  
|Amortization of debt discount                                                |  |        | 26       |   |            |   |        |                |  |   |             |   |  |       |         |   |  |   | 26       |  
|Non-cash charge related to joint venture                                     |  |        |         |   |            |   |        |                |  |   |             |   |  |       | 4,045    |   |  |   | 4,045    |  
|Other                                                                        |  |        |         |   |            |   | 7       |                |  |   |             |   |  |       |         |   |  |   | 7        |  
|Change in assets and liabilities                                            |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|(Increase) decrease in accounts receivable                                   |  |        |         |   |            |   | (62,936 | )              |  |   | (7,771       | ) |  |       |         |   |  |   | (70,707  | )
|Decrease in inventories                                                      |  |        |         |   |            |   | 4,925   |                |  |   | 886          |   |  |       |         |   |  |   | 5,811    |  
|Decrease in prepaid expenses and other                                       |  |        | 403      |   |            |   | 782     |                |  |   | 320          |   |  |       |         |   |  |   | 1,505    |  
|(Increase) decrease in other assets                                          |  |        | (319     | ) |            |   | 2,240   |                |  |   | 2,159        |   |  |       |         |   |  |   | 4,080    |  
|Increase in insurance deposits                                               |  |        |         |   |            |   | (2,966  | )              |  |   |             |   |  |       |         |   |  |   | (2,966   | )
|(Increase) decrease in due to/from affiliates                                |  |        | 205,744  |   |            |   | (21,356 | )              |  |   | (4,280       | ) |  |       | (180,108 | ) |  |   |         |  
|Decrease in accounts payable                                                 |  |        |         |   |            |   | (2,445  | )              |  |   | (269         | ) |  |       |         |   |  |   | (2,714   | )
|Increase in accrued liabilities and other liabilities                        |  |        | 1,642    |   |            |   | 29,368  |                |  |   | 8,052        |   |  |       |         |   |  |   | 39,062   |  
|Decrease in deferred revenue                                                 |  |        |         |   |            |   | (264    | )              |  |   | (18          | ) |  |       |         |   |  |   | (282     | )
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Net cash provided by (used in) operating activities                          |  |        | 3,152    |   |            |   | 4,551   |                |  |   | (1,258       | ) |  |       | 265      |   |  |   | 6,710    |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Cash flows from investing activities                                         |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Capital expenditures                                                         |  |        |         |   |            |   | (6,771  | )              |  |   | 997          |   |  |       |         |   |  |   | (5,774   | )
|Proceeds from the sale of property and equipment                             |  |        |         |   |            |   | 1,909   |                |  |   | 60           |   |  |       |         |   |  |   | 1,969    |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Net cash provided by (used in) investing activities                          |  |        |         |   |            |   | (4,862  | )              |  |   | 1,057        |   |  |       |         |   |  |   | (3,805   | )
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Cash flows from financing activities                                         |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Repayments on credit facility, net                                           |  |        | (3,765   | ) |            |   |        |                |  |   |             |   |  |       |         |   |  |   | (3,765   | )
|Repayment of debt and capital lease obligations                              |  |        |         |   |            |   | (2,244  | )              |  |   | (529         | ) |  |       |         |   |  |   | (2,773   | )
|Borrowings under capital lease obligations                                   |  |        |         |   |            |   | 283     |                |  |   |             |   |  |       |         |   |  |   | 283      |  
|Distributions to minority shareholders                                       |  |        |         |   |            |   |        |                |  |   | (432         | ) |  |       |         |   |  |   | (432     | )
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Issuance of common stock                                                     |  |        | 348      |   |            |   |        |                |  |   |             |   |  |       |         |   |  |   | 348      |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Net cash used in financing activities                                        |  |        | (3,417   | ) |            |   | (1,961  | )              |  |   | (961         | ) |  |       |         |   |  |   | (6,339   | )
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Effect of currency exchange rate changes on cash                             |  |        | 265      |   |            |   |        |                |  |   | 265          |   |  |       | (265     | ) |  |   | 265      |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Increase (decrease) in cash                                                  |  |        |         |   |            |   | (2,272  | )              |  |   | (897         | ) |  |       |         |   |  |   | (3,169   | )
|Cash, beginning of year                                                      |  |        |         |   |            |   | 9,035   |                |  |   | 3,877        |   |  |       |         |   |  |   | 12,912   |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  
|Cash, end of year                                                            |  | $      |         |   |            | $ | 6,763   |                |  | $ | 2,980        |   |  | $     |         |   |  | $ | 9,743    |  
|                                                                             |  |        |          |   |            |   |         |                |  |   |              |   |  |       |          |   |  |   |          |  



|* | - Refer to Note 2, Restatement of Consolidated Financial Statements.
|- | --------------------------------------------------------------------



78



---

Debt Maturities



Aggregate maturities on long-term debt for each of the fiscal years ending June 30, including the effect of the 2003
amendment to the credit facility discussed above, are as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 1,329  
|2005       |  |   | 1,428  
|2006       |  |   | 1,473  
|2007       |  |   | 152,566
|2008       |  |   | 149,891
|Thereafter |  |   | 87     
|           |  |   |        
|           |  | $ | 306,774
|           |  |   |        



The Company incurred
interest expense of approximately $28.1 million, $25.5 million and $30.6 million and paid interest of approximately $25.4 million, $21.9 million and $29.0 million in the years ended June 30, 2003, 2002 and 2001, respectively.



The Company had outstanding letters of credit totaling approximately $3.5
million at June 30, 2003 and 2002 for insurance and guarantees under contracts.



|(13) | Income Taxes
|---- | ------------



The components of the income tax (provision) benefit applicable to continuing operations were as follows (in thousands):



|                                   |  |                     |      |   |      |   |       |      |  |   |        |  
|---------------------------------- |  | ------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                   |  | Year ended June 30, |     
|                                   |  | 2003                |      |   | 2002 |   |       | 2001 | 
|Current                            |  |                     |      |   |      |   |       |      |  |   |        |  
|State                              |  | $                   | (340 | ) |      | $ | (130  | )    |  | $ | (637   | )
|Total current (provision) benefit  |  |                     | (340 | ) |      |   | (130  | )    |  |   | (637   | )
|                                   |  |                     |      |   |      |   |       |      |  |   |        |  
|Deferred                           |  |                     |      |   |      |   |       |      |  |   |        |  
|Federal                            |  |                     |     |   |      |   | 2,650 |      |  |   | (500   | )
|State                              |  |                     | 143  |   |      |   |      |      |  |   |        |  
|                                   |  |                     |      |   |      |   |       |      |  |   |        |  
|Total deferred (provision) benefit |  |                     | 143  |   |      |   | 2,650 |      |  |   | (500   | )
|                                   |  |                     |      |   |      |   |       |      |  |   |        |  
|Total (provision) benefit          |  | $                   | (197 | ) |      | $ | 2,520 |      |  | $ | (1,137 | )
|                                   |  |                     |      |   |      |   |       |      |  |   |        |  



The income tax benefit
in 2002 included federal income tax refunds of $0.6 million resulting from legislation that allowed the Company to carry back a portion of its net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which
recognition was deferred until receipt.



79



---

The income tax (provision) benefit differs from the amount computed by applying the statutory U.S.
federal income tax rate of 35% to loss from continuing operations before income taxes and cumulative effect of change in accounting principle as follows (in thousands):



|                                                         |  |                     |       |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                         |  | Year ended June 30, |      
|                                                         |  | 2003                |       |   | 2002 |   |        | 2001 | 
|                                                         |  | (in thousands)      |      
|Federal income tax (provision) benefit at statutory rate |  | $                   | 1,109 |   |      | $ | 753    |      |  | $ | 48,276  |  
|State taxes, net of federal benefit                      |  |                     | (221  | ) |      |   | (85    | )    |  |   | (414    | )
|Amortization of nondeductible goodwill                   |  |                     |      |   |      |   |       |      |  |   | (698    | )
|Change in valuation allowance                            |  |                     | (994  | ) |      |   | (1,951 | )    |  |   | (47,321 | )
|Other, net                                               |  |                     | (91   | ) |      |   | (99    | )    |  |   | (980    | )
|                                                         |  |                     |       |   |      |   |        |      |  |   |         |  
|(Provision for) benefit from income taxes                |  | $                   | (197  | ) |      | $ | 2,520  |      |  | $ | (1,137  | )
|                                                         |  |                     |       |   |      |   |        |      |  |   |         |  



The following table
summarizes the components of the Companys net deferred tax liability as of June 30, 2003 and 2002.



|                                                   |  |                |         |   |      |   |         |  
|-------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                   |  | June 30,       |        
|                                                   |  | 2003           |         |   | 2002 |  
|                                                   |  | (in thousands) |        
|Deferred tax assets:                               |  |                |         |   |      |   |         |  
|Net operating loss carryforwards                   |  | $              | 77,389  |   |      | $ | 57,326  |  
|Capital loss carryforwards                         |  |                | 21,045  |   |      |   |        |  
|Accounts receivable valuation                      |  |                | 9,463   |   |      |   | 12,849  |  
|Restructuring and other reserves                   |  |                | 770     |   |      |   | 31,372  |  
|Insurance claim reserves                           |  |                | 9,692   |   |      |   | 12,639  |  
|Other                                              |  |                | 1,013   |   |      |   | 4,277   |  
|Compensation and benefits                          |  |                | 2,395   |   |      |   | 2,480   |  
|                                                   |  |                |         |   |      |   |         |  
|Gross deferred tax assets                          |  |                | 121,767 |   |      |   | 120,943 |  
|                                                   |  |                |         |   |      |   |         |  
|Deferred tax liabilities:                          |  |                |         |   |      |   |         |  
|Partnership losses                                 |  |                | (25,623 | ) |      |   | (23,978 | )
|Accelerated depreciation and amortization          |  |                | (12,983 | ) |      |   | (8,191  | )
|Other                                              |  |                | (921    | ) |      |   | (1,441  | )
|                                                   |  |                |         |   |      |   |         |  
|Gross deferred tax liabilities                     |  |                | (39,527 | ) |      |   | (33,610 | )
|                                                   |  |                |         |   |      |   |         |  
|Net deferred tax assets before valuation allowance |  |                | 82,240  |   |      |   | 87,333  |  
|Less: Valuation allowance                          |  |                | (82,890 | ) |      |   | (87,983 | )
|                                                   |  |                |         |   |      |   |         |  
|Net deferred liability                             |  | $              | (650    | ) |      | $ | (650    | )
|                                                   |  |                |         |   |      |   |         |  



As of June 30, 2003,
the Company had net operating loss carry forwards for federal income tax purposes of approximately $200 million which begin to expire in 2008. The Company also had capital loss carryforwards for federal income tax purposes of approximately $54
million, which begin to expire in 2006. If the Company experiences an ownership change as defined by the Internal Revenue Code, its ability to utilize its carryforwards may be limited.



The Company maintains a valuation allowance for the portion of its net deferred tax assets for which it is more likely than
not that the related benefits will not be realized. The valuation allowance, which totaled $82.9 million at June 30, 2003 and $88.0 at June 30, 2002, was based upon managements analysis of available information including the net operating
losses experienced in recent years. The Company will begin to release the valuation allowance when it is more likely than not that the deferred tax asset will be realized.



80



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Cash payments (refunds) for income taxes were $0.3 million, $(2.2) million and $1.9 million during the
years ended June 30, 2003, 2002 and 2001, respectively.



|(14) | Redeemable Nonconvertible Participating Preferred Stock
|---- | -------------------------------------------------------



The Companys restated certificate of incorporation includes authorization to issue 2,000,000 shares of the Companys $.01 par value preferred
stock. The preferred stock may be issued in one or more series as determined by the Companys Board of Directors.



Series B Redeemable Nonconvertible Participating Preferred Stock



In connection with the 2002 Amended Credit Facility, the Company issued 211,549 shares of its Series B Redeemable
Nonconvertible Participating Preferred Stock (the Series B Shares) to the lenders in the credit facility. The Series B Shares are not convertible by the holder but the Company may elect (subject to approval by the Companys
shareholders of an increase in the number of authorized common shares discussed below) to settle the Series B Shares by issuance of 2,115,490 common shares which was equivalent to 10% of the Companys common shares then outstanding on a diluted
basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible into the Companys common stock for consideration less than the fair market value of such securities at the time of
such transaction. Conversion of the Series B Shares occurs upon notice from the Company; however, because a sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to
amend its certificate of incorporation to authorize additional common shares. Should the Companys stockholders fail to approve such a proposal by December 31, 2004, the Company will be required to redeem the Series B Shares for a price equal
to the greater of $15.0 million or the value of the common shares into which the Series B Shares would otherwise have been convertible. In addition, should the Companys stockholders fail to approve such a proposal, the Series B Shares enjoy a
preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the Series B Shares would otherwise have been convertible or (ii)
$12.5 million or $15.0 million depending on whether such sale or liquidation event occurs prior to December 31, 2003 or December 31, 2004, respectively. At the election of the holder, the Series B Shares carry voting rights as if such shares were
converted into common shares. The Series B Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is declared on the Companys common stock, the holders of the Series B shares shall be entitled to receive
at least the equivalent amount of dividends they would have received had their Series B shares been converted to common stock. The Series B shares (and the common shares issueable upon conversion) are entitled to certain registration rights. The
terms of the Series B Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.



The Company recorded the Series B Shares at their estimated fair value at the date of issuance ($4.2 million) with an
offsetting increase in debt issue costs, which are included in other assets in the consolidated balance sheet. As the Company may be required to redeem the Series B Shares for cash as outlined above, such shares have been classified outside of
stockholders equity (deficit). Additionally, the original value of the Series B Shares is being accreted to its redemption value through December 31, 2004 with an offsetting charge to additional paid-in capital. Such accretion totaled $3.6
million during the fiscal 2003.



Series C Redeemable
Nonconvertible Participating Preferred Stock



In
connection with the 2003 Amended Credit Facility, the Company issued 283,979 shares of its Series C Redeemable Nonconvertible Participating Preferred Stock (the Series C Shares) to certain of the lenders in the credit facility. The
Series C Shares are not convertible by the holder but the Company may elect (subject to approval by the Companys shareholders of an increase in the number of authorized common shares discussed below) to settle the Series C Shares by issuance
of 2,839,787 common shares which was equivalent to 11% of the Companys common shares then outstanding on a diluted basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible
into the Companys common stock for consideration less than the fair market value of such securities at the time of such transaction. Conversion of the Series C Shares occurs automatically upon notice from the Company; however, because a
sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to amend its certificate of incorporation to authorize additional common shares. Should the Companys
stockholders fail to approve such a proposal by December 31, 2006, the Company will be required to redeem the Series C Shares for a price equal to the greater of $10.0 million or the value of the common



81



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shares into which the Series C Shares would otherwise have been convertible. In addition, should the Companys stockholders fail to approve such a
proposal, the Series C Shares enjoy a preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the Series C Shares would
otherwise have been convertible or (ii) $11.0 million, $13.75 million or $16.5 million depending on whether such sale or liquidation event occurs prior to January 31, 2004, between January 31, 2004 and December 31, 2004 or December 31, 2004,
respectively. At the election of the holder, the Series C Shares carry voting rights as if such shares were converted into common shares. The Series C Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is
declared on the Companys common stock, the holders of the Series C shares shall be entitled to receive at least the equivalent amount of dividends they would have received had their Series C shares been converted to common stock. The Series C
shares (and the common shares issueable upon conversion) are entitled to certain registration rights. The terms of the Series C Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming,
shares of junior stock.



The Company will record the Series C
Shares at their estimated fair value at the date of issuance with an offsetting increase in debt issue costs. As the Company may be required to redeem the Series C Shares for cash as outlined above, such shares will be classified outside of
stockholders equity (deficit). Additionally, the original value of the Series C Shares will be accreted to its redemption value through December 31, 2006 with an offsetting charge to additional paid-in capital.



|(15) | Stockholders Equity
|---- | --------------------



In August 1995, the Company adopted a shareholders rights plan, which authorized the distribution of one right to purchase one one-thousandth of a
share of $0.01 par value Series A Junior Participating Preferred Stock (a Right) for each share of common stock of the Company. Rights will become exercisable following the tenth day (or such later date as may be determined by the Board of
Directors) after a person or group (a) acquires beneficial ownership of 15% or more of the Companys common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or
more of the Companys common stock. In connection with the 2003 Amended Credit Facility, the Company adopted an amendment providing that ownership solely of Series B Shares or Series C Shares (or common stock issued or issuable upon conversion
thereof) does not constitute a triggering event under the plan.



Upon exercise, each Right will entitle the holder (other than the party seeking to acquire control of the Company) to acquire shares of common stock of the Company or, in certain circumstances, such acquiring person at a 50% discount from
market value. The Rights may be terminated by the Board of Directors at any time prior to the date they become exercisable at a price of $0.01 per Right; thereafter, they may be redeemed for a specified period of time at $0.01 per Right.



|(16) | Employee Benefit Plans
|---- | ----------------------



Employee Stock Purchase Plan



The Company established the Employee Stock Purchase Plan (the ESPP) through which eligible employees may purchase shares of the Companys
common stock, at semi-annual intervals, through periodic payroll deductions. The ESPP is a qualified employee benefit plan under Section 423 of the Internal Revenue Code. The Company has reserved 2,150,000 shares of stock for issuance under the
ESPP. The purchase price per share is the lower of 85% of the closing price of the stock on the first day or the last day of the offering period or on the nearest prior day on which trading occurred on the Nasdaq SmallCap Market. Employees purchased
570,801, 559,668, and 273,584 shares of the Companys common stock under the ESPP during fiscal years 2003, 2002 and 2001, respectively, at average per share prices of $0.60, $0.48 and $1.27.



1992 Stock Option Plan



The Companys 1992 Stock Option Plan (the 1992 Plan) was
adopted in November 1992 and expired November 5, 2002. The 1992 Plan provided for the granting of options to acquire common stock of the Company, direct granting of the common stock of the Company (Stock Awards), the granting of stock
appreciation rights (SARs), or the



82



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granting of other cash awards (Cash Awards) (Stock Awards, SARs and Cash Awards are collectively referred to herein as Awards). At
June 30, 2003, the maximum number of shares of common stock issuable under the 1992 Plan was 6.0 million of which approximately 875,000 options had been exercised. Approximately 4.6 million options remain outstanding under the 1992 Plan at June 30,
2003. Options were granted as incentive stock options or non-qualified stock options.



Options and Awards were granted only to persons who at the time of grant are either key personnel of the Company or consultants and independent contractors who provide valuable services to the Company. Options that
are incentive stock options may be granted only to key personnel of the Company.



The 1992 Plan, as amended, provided for the automatic grant of options whereby each non-employee member of the Board of Directors was granted an option to acquire 2,500 shares of common stock annually. Each
non-employee member of the Board of Directors also received an annual automatic grant of options to acquire an additional 1,000 shares for each $0.05 increase in the Companys earnings per share, subject to a maximum of 5,000 additional
options. New non-employee members of the Board of Directors received options to acquire 10,000 shares of common stock on the date of their first appointment or election to the Board of Directors.



The terms of each Award were established by the Board of Directors at the
time of grant. Options granted under the 1992 Plan vest over periods not exceeding five years.



Awards granted in the form of SARs entitled the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of common stock from the price stated in the award agreement to the
market value of the common stock on the date first exercised or surrendered. The Board of Directors determined such terms, conditions, restrictions and/or limitations, if any, on any SARs.



2000 Non-Qualified Stock Option Plan



The Companys 2000 Non-Qualified Stock Option Plan (the 2000
Plan) was adopted in August 2000 and provides for the granting of options to acquire common stock of the Company. At the time of adoption, the maximum number of shares of common stock issuable under the 2000 Plan was 2.0 million of which
approximately 180,000 options have been exercised. Approximately 1.6 million of options remain outstanding under the 2002 Plan as of June 30, 2003.



Options may be granted only to persons who at the time of grant are either regular employees, excluding Directors and Officers, or persons who provide
consulting or other services as independent contractors to the Company.



The terms of each Award were established by the Board of Directors at the time of grant. Options granted to date vest over periods not exceeding three years.



83



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The following summarizes stock option activity in the 1992 Plan and the 2000 Plan:



|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|-------------------------------------------------------- |  | ------------------------ | - |  | ------------------------ |  | ----------------------------- |  | - | ----- |  | - | -----
|                                                         |  | Year ended June 30, 2003
|                                                         |  | Number of Shares         |   |  | Exercise Price Per share |  | WeightedAverage Exerciseprice
|Options outstanding at beginning of year                 |  | 5,198,978                |   |  | $0.39                    |  | -                             |  | $ | 36.00 |  | $ | 7.79 
|Granted                                                  |  | 1,697,000                |   |  | $2.00                    |  | -                             |  | $ | 2.24  |  | $ | 2.00 
|Canceled                                                 |  | (672,216                 | ) |  | $0.39                    |  | -                             |  | $ | 32.88 |  | $ | 15.60
|Exercised                                                |  | (93,471                  | ) |  | $0.39                    |  | -                             |  | $ | 1.50  |  | $ | 0.69 
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options outstanding at end of year                       |  | 6,130,291                |   |  | $0.39                    |  | -                             |  | $ | 36.00 |  | $ | 5.25 
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options exercisable at end of year                       |  | 4,173,976                |   |  | $0.39                    |  | -                             |  | $ | 36.00 |  | $ | 7.00 
|Options available for grant at end of year               |  | 265,246                  |   |  |                          |  |                               |  |   |       |  |   |      
|Weighted average fair value per share of options granted |  |                          |   |  |                          |  |                               |  |   |       |  | $ | 1.43 
|                                                         | 
|                                                         |  | Year ended June 30, 2002
|                                                         |  | Number of Shares         |   |  | Exercise Price Per share |  | WeightedAverage Exerciseprice
|Options outstanding at beginning of year                 |  | 4,441,668                |   |  | $1.25                    |  | -                             |  | $ | 36.00 |  | $ | 11.77
|Granted                                                  |  | 1,818,000                |   |  | $0.39                    |  | -                             |  | $ | 0.86  |  | $ | 0.56 
|Canceled                                                 |  | (869,183                 | ) |  | $0.39                    |  | -                             |  | $ | 33.38 |  | $ | 14.48
|Exercised                                                |  | (191,507                 | ) |  | $0.39                    |  | -                             |  | $ | 1.50  |  | $ | 0.98 
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options outstanding at end of year                       |  | 5,198,978                |   |  | $0.39                    |  | -                             |  | $ | 36.00 |  | $ | 7.79 
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options exercisable at end of year                       |  | 3,654,817                |   |  | $0.39                    |  | -                             |  | $ | 36.00 |  | $ | 10.48
|Options available for grant at end of year               |  | 1,750,294                |   |  |                          |  |                               |  |   |       |  |   |      
|Weighted average fair value per share of options granted |  |                          |   |  |                          |  |                               |  |   |       |  | $ | 0.26 
|                                                         | 
|                                                         |  | Year ended June 30, 2001
|                                                         |  | Number of Shares         |   |  | Exercise Price Per share |  | WeightedAverage Exerciseprice
|Options outstanding at beginning of year                 |  | 3,581,992                |   |  | $1.25                    |  | -                             |  | $ | 36.00 |  | $ | 17.35
|Granted                                                  |  | 1,582,750                |   |  | $1.50                    |  | -                             |  | $ | 2.00  |  | $ | 1.57 
|Canceled                                                 |  | (723,074                 | ) |  | $1.25                    |  | -                             |  | $ | 32.25 |  | $ | 17.10
|Exercised                                                |  |                         |   |  |                          |  |                               |  |   |      |  |   |     
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options outstanding at end of year                       |  | 4,441,668                |   |  | $1.25                    |  | -                             |  | $ | 36.00 |  | $ | 11.77
|                                                         |  |                          |   |  |                          |  |                               |  |   |       |  |   |      
|Options exercisable at end of year                       |  | 3,190,462                |   |  | $1.25                    |  | -                             |  | $ | 36.00 |  | $ | 14.79
|Options available for grant at end of year               |  | 2,788,361                |   |  |                          |  |                               |  |   |       |  |   |      
|Weighted average fair value per share of options granted |  |                          |   |  |                          |  |                               |  |   |       |  | $ | 0.72 



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The following table summarizes options outstanding and exercisable at June 30, 2003 for options issued
under the 1992 Plan and the 2000 Plan:



|                        |  |                     |  |                                             |  |                                 |       |                     |           |                                 |   |      
|----------------------- |  | ------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------- | --------- | ------------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                        
|Range ofExercise prices |  | Options Outstanding |  | Weighted Average Remaining Contractual life |  | Weighted Average Exercise price |       | Options Exercisable |           | Weighted Average Exercise price
|$0.39    $0.39         |  | 884,193             |  | 8.47                                        |  | $                               | 0.39  |                     | 559,045   |                                 | $ | 0.39 
|$0.44    $ 0.86        |  | 694,000             |  | 8.29                                        |  | $                               | 0.84  |                     | 394,000   |                                 | $ | 0.83 
|$1.25    $ 1.38        |  | 10,560              |  | 6.25                                        |  | $                               | 1.34  |                     | 10,560    |                                 | $ | 1.34 
|$1.50    $1.50         |  | 899,082             |  | 7.14                                        |  | $                               | 1.50  |                     | 774,082   |                                 | $ | 1.50 
|$1.56    $ 1.63        |  | 37,500              |  | 7.00                                        |  | $                               | 1.60  |                     | 37,500    |                                 | $ | 1.60 
|$2.00    $ 2.00        |  | 1,869,965           |  | 9.01                                        |  | $                               | 2.00  |                     | 693,798   |                                 | $ | 2.00 
|$2.24    $ 7.81        |  | 840,000             |  | 5.73                                        |  | $                               | 7.01  |                     | 810,000   |                                 | $ | 7.18 
|$8.00    $29.00        |  | 620,648             |  | 4.42                                        |  | $                               | 18.09 |                     | 620,648   |                                 | $ | 18.09
|$32.25  $34.50         |  | 251,843             |  | 3.46                                        |  | $                               | 32.56 |                     | 251,843   |                                 | $ | 32.56
|$36.00  $36.00         |  | 22,500              |  | 3.39                                        |  | $                               | 36.00 |                     | 22,500    |                                 | $ | 36.00
|                        |  |                     |  |                                             |  |                                 |       |                     |           |                                 |   |      
|$ 0.39   $36.00        |  | 6,130,291           |  | 7.39                                        |  | $                               | 5.25  |                     | 4,173,976 |                                 | $ | 7.00 
|                        |  |                     |  |                                             |  |                                 |       |                     |           |                                 |   |      



During fiscal 2003,
the Company recorded non-cash stock compensation expense totaling $139,000 relating to the modification of stock options for certain executives of the Companys former Latin American operations. The related charges are included in income (loss)
from discontinued operations in the accompanying consolidated statement of operations. During 2002, the Company recorded a non-cash charge of $73,000 in other operating expenses relating to stock options issued to non-employees in exchange for
services rendered.



401(k) Plan



The Company has a contributory retirement plan (the 401(k) Plan)
covering eligible employees who are at least 18 years old. The 401(k) Plan is designed to provide tax-deferred income to the Companys employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code.



The 401(k) Plan provides that each participant may contribute up to 17% of
his or her respective salary, not to exceed the annual statutory limit. The Company, at its discretion, may elect to make matching contributions in the form of cash or the Companys common stock to each participants account as determined
by the Board of Directors. Under the terms of the 401(k) Plan, the Company may also make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant
has the right to direct the investment of his or her funds.



The Company accrued a matching contribution of approximately $1.7 million for the 401(k) Plan year ended December 31, 2000. During fiscal 2002, the Company made the decision not to make this discretionary contribution and reversed the
accrual of $1.7 million to income.



Employee Stock Ownership
Plan



The Company established the Employee Stock Ownership
Plan (the ESOP) in 1979 and makes related contributions at the discretion of the Board of Directors. No discretionary contributions were made during fiscal 2003, 2002 and 2001. The ESOP held approximately 4.5% and 5.0% of the outstanding
common stock of the Company for the benefit of all participants, as of June 30, 2003 and 2002, respectively. The ESOP is administered by the ESOPs Advisory Committee, consisting of certain officers of the Company.



In July 1999, the Companys Board of Directors approved an amendment to
freeze the ESOP, effective June 30, 1999 with respect to all employees other than members of collective bargaining agreements that include participation in the ESOP. All participants accounts were fully vested as of June 30, 1999.
The Company does not intend to make any contributions to the ESOP in the future.



85



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|(17) | Commitments And Contingencies
|---- | -----------------------------



Medicare Fee Schedule



On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels of ground ambulance services,
ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54 (which is adjusted each year by the CPI  1%) plus
separate mileage charges based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may
be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on Medicare claims, which means a provider must accept Medicares allowed reimbursement rate as full
payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. In addition, the Final Rule calls for a five-year phase-in period to allow time for providers to adjust to the
new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter.



The Company currently believes that the Medicare Ambulance Fee Schedule will have a neutral net impact on its medical
transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of its operations. These rules could, however, result in contract renegotiations or other actions to offset any negative impact at the
regional level that could have a material adverse effect on its business, financial condition, cash flows, and results of operations. Changes in reimbursement policies, or other governmental actions, together with the financial challenges of some
private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in
the Companys cost structure relative to increases in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on its business, financial condition, cash flows, and
results of operations.



Surety Bonds



Certain counties, municipalities, and fire districts require the Company to
provide a surety bond or other assurance of financial or performance responsibility. The Company may also be required by law to post a surety bond as a prerequisite to obtaining and maintaining a license to operate. As a result, the Company has a
portfolio of surety bonds that is renewed annually. The Company has $10.1 million of surety bonds outstanding as of June 30, 2003.



Operating Leases



The Company leases various facilities and equipment under non-cancelable operating lease agreements. Rental expense charged to operations under these
leases (including leases with terms of less than one year) was approximately $11.5 million in fiscal 2003 and 2002 and $12.1 million in fiscal 2001.



Minimum rental commitments under non-cancelable operating leases for each of the years ending June 30 are as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2004       |  | $ | 7,760 
|2005       |  |   | 6,638 
|2006       |  |   | 5,446 
|2007       |  |   | 3,835 
|2008       |  |   | 2,832 
|Thereafter |  |   | 8,833 
|           |  |   |       
|Total      |  | $ | 35,344
|           |  |   |       



86



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Indemnifications



The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may
be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to
property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Companys negligence or willful misconduct, or breach of representations and warranties and covenants.



Additionally, some of the Companys agreements with customers require
the Company to provide certain assurances related to the performance of its services. Such assurances, from time to time, obligate the Company to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign
equipment or facilities (either temporarily or permanently) in the event of material defaults or other certain circumstances, or (iii) provide surety bonds or letters of credit issued in favor of the customer to cover costs resulting, under certain
circumstances, from an uncured material default . With respect to such surety bonds, the Company is also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.



The Company and its subsidiaries provide for indemnification of directors,
officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors and
officers insurance which should enable it to recover a portion of any future amounts paid.



In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with
sales of its securities and the engagement of financial advisors and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in
certain other circumstances relating to the sale of securities or their engagement by the Company.



While the Companys future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not
contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Companys obligations and the unique facts and circumstances involved in each
particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Companys business, financial condition, and cash flows or results of operations. Additionally, the Company
does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Companys business, financial condition, cash flows or results of operations.



Legal Proceedings



From time to time, the Company is subject to litigation and regulatory
investigations arising in the ordinary course of business. The Company believes that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on its business, financial condition, results of operations
or cash flows. However, the Company is unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of its
deductible or self insured retention arising out of such claims. In addition, due to the nature of the Companys business, CMS and other regulatory agencies are expected to continue their practice of performing periodic reviews and initiating
investigations related to the Companys compliance with billing regulations. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material
adverse effect on the Companys business, financial condition, results of operations or cash flows.



Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation:The Company, Warren S. Rustand, the former Chairman of the Board
and Chief Executive Officer of the Company, James H. Bolin, the former Vice Chairman of the Board, and Robert E. Ramsey, Jr., its former Executive Vice President and former Director, were named as defendants in two purported class action lawsuits:
HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V.



87



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RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. The two lawsuits,
which contained virtually identical allegations, were brought on behalf of a class of persons who purchased the Companys publicly traded securities including its common stock between April 24, 1997 and June 11, 1998. Haskell v. Rural/Metro
sought unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud Act, and under Arizona common law fraud, and also sought punitive damages, a constructive trust, and other injunctive relief. Ruble v. Rural/Metro sought
unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints in both actions alleged that between April 24, 1997 and June 11, 1998 the defendants issued certain false and misleading statements
regarding certain aspects of the Companys financial status and that these statements allegedly caused the Companys common stock to be traded at artificially inflated prices. The complaints also alleged that Mr. Bolin and Mr. Ramsey sold
stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated.



On April 17, 2003, Rural/Metro and the individual defendants agreed to settle the Ruble v. Rural/Metro and Haskell v. Rural/Metro cases with plaintiffs,
subject to notice to the class and final court approval. Rural/Metros primary and excess carriers funded the settlement on June 5, 2003 by depositing the funds in a designated escrow account and waived any claims for reimbursement of the funds
subject to final court approval of the class action settlement. On August 20, 2003, the plaintiffs submitted an application for preliminary approval of the class action settlement. On September 3, 2003, the court signed an order granting preliminary
approval of the stipulated settlement and set forth a schedule for the events required for final settlement approval, including notice to the class, requests for exclusion, written objections and responses. The hearing for consideration of the final
settlement agreement is scheduled for December 9, 2003.



In the
settlement agreement, the Company and the individual defendants expressly denied all charges of liability or wrongdoing and continued to assert that at all relevant times they acted in good faith and in a manner they reasonably believed to be in the
best interests of the Company and its stockholders.



Springborn, et al. v. Rural/Metro Corporation, et al.:The Company, Arthur Andersen LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and Jane Doe
Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe Carpenter, William C. Turner and Jane Doe Turner, Henry G.
Walker and Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO
CORPORATION, ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa County, Arizona Superior Court. The lawsuit was brought on behalf of employee firefighters in Maricopa County who participated in the Companys
Employee Stock Ownership Plan (ESOP), Employee Stock Purchase Plan (ESPP) and/or Retirement Savings Value Plan (401(k) Plan) 401(k) plan. Collectively, the Plans.. The action purports to cover a class
period of July 1, 1996 through June 30, 2001. The plaintiffs amended the Complaint on October 17, 2002 adding Barry Landon and Jane Doe Landon as defendants and making certain additional allegations and claims. The primary allegations of the
complaint included violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Plans. The plaintiffs sought unspecified compensatory and punitive damages.



On October 30, 2002, defendant Arthur Andersen LLP removed the action to the
United States District Court, District of Arizona, CIV-02-2183-PHX-JWS. The Company and the individual defendants consented to this removal. On February 21, 2003, the Company and its current directors and officers moved to dismiss the amended
complaint, and its former directors and officers subsequently joined in this motion.



On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against the Company and its current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal
from the courts July 29, 2003 order to the Ninth Circuit. The court has yet to consider and rule upon defendant Arthur Andersens motion to dismiss.



88



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Regulatory Compliance



The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and
regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. The Company believes that it is substantially in compliance with fraud and
abuse statutes as well as their applicable government review and interpretation as well as regulatory actions unknown or unasserted at this time.



The Company has been subject to investigations in the past relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperated fully
with the government agencies that conducted these investigations. Those reviews cover periods prior to the Companys acquisition of certain operations as well as periods subsequent to acquisition. Management believes that the remedies existing
under specific purchase agreements along with reserves established in the consolidated financial statements are sufficient so that the ultimate outcome of these matters would not have a material adverse effect on its business, financial condition,
results of operations or cash flows.



The Company became aware
of, and has taken corrective action with respect to, various issues arising primarily from the transition to the Company from various acquired operations of Federal Communications Commission (FCC) licenses for public safety and private wireless
radio frequencies used in the ordinary course of its business. While the Company does not currently anticipate that action with respect to these issues by the FCCs enforcement bureau will result in material monetary fines or license
forfeitures, there can be no assurance that this will be the case.



Nasdaq Listing



On May 22, 2003, the Nasdaq
Stock Market (Nasdaq) notified the Company that it was not in compliance with a Nasdaq SmallCap Market maintenance standard. This standard requires that the Company file with Nasdaq copies of all reports and other documents filed or required to be
filed with the Securities and Exchange Commission on a timely basis.



The notification followed the Companys announcement on May 14, 2003 that it would delay filing its Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate its consolidated financial statements for inadequate
provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. The Company announced that it would file the applicable Form 10-Q upon finalization of the related restatement
adjustments.



The Company subsequently submitted its request
for a Nasdaq Listing Qualifications Panel (the Panel) hearing to consider its continued listing. The hearing was held June 19, 2003, where the Company presented its basis for a temporary exception to the filing requirement in order to
complete its related analysis.



On July 17, 2003, Nasdaq
informed the Company that the Panel had made a determination. In its decision to grant an exception, the Panel determined that the Companys securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September
30, 2003 deadline for filing its Form 10-Q for the third quarter ended March 31, 2003 and its Form 10-K for the fiscal year ended June 30, 2003.



In addition to granting the filing exception through September 30, 2003, the Panel specifically required the Company to timely file all periodic reports
with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should the Company miss a filing deadline in accordance with the exception, it will not be entitled to a new hearing on the matter
and its securities may be delisted from The Nasdaq SmallCap Market. In the event the Company fails to comply with any continued listing requirement during the exception period, it will be provided with written notice of the deficiency and an
opportunity to present a definitive plan to address the issue prior to the Panels decision as to whether continued listing is appropriate.



89



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The Panel reserved the right to terminate or modify the terms of this exception upon a review of the
Companys reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There can be no assurance the Company will evidence compliance with the requirements as set forth by Nasdaq or that it will
return to continued listing on The Nasdaq SmallCap Market.



On
September 29, 2003, the Company issued a press release indicating that the filing of its Form 10-K for fiscal 2003 would be delayed. The Company also filed a Form 12b-25 request with the SEC for an extension to file its Form 10-K on or before
October 14, 2003. Due to such delayed filing, the Company formally requested, on September 30, 2003, that the Panel permit it to comply with their July 17, 2003 decision by filing both the Form 10-K for fiscal 2003 and the Form 10-Q for the period
ended March 31, 2003 on or before October 14, 2003. On October 7, 2003 the Panel informed the Company that its requested modification to their July 17, 2003 decision was granted.



|(18) | Financial Instruments
|---- | ---------------------



The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different
market assumptions or valuation methodologies could have a material effect on the estimated fair value assumptions.



The carrying values of cash, accounts receivable, accounts payable, accrued liabilities and other liabilities approximates the related fair values due to
the short-term maturities of these instruments. The carrying value of notes payable and capital lease obligations approximate the related fair values as rates on these instruments approximate market rates currently available for instruments with
similar terms and remaining maturities. The fair value of the Senior Notes was determined by the market price as of June 30, 2003. The relationship between the fair value and carrying value of the Senior Notes was then applied to the amount
outstanding under the 2002 Amended Credit Facility to arrive at its estimated fair value. The fair value of the Companys Series B Redeemable Nonconvertible Participating Preferred Stock was determined by reference to the market price for the
Companys common stock at June 30, 2003. A comparison of the fair value and carrying value of the Senior Notes and 2002 Amended Credit Facility is as follows (in thousands):



|                                                                 |  |                |         |                |   |            |  |                |        |  |   |        
|---------------------------------------------------------------- |  | -------------- | ------- | -------------- | - | ---------- |  | -------------- | ------ |  | - | -------
|                                                                 |  | As of June 30,
|                                                                 |  | 2003           |         | 2002          
|                                                                 |  | Fair value     |         | Recorded value |   | Fair value |  | Recorded value
|Credit Facility                                                  |  | $              | 121,936 |                | $ | 152,420    |  | $              | 93,840 |  | $ | 144,369
|Senior Notes                                                     |  | $              | 119,902 |                | $ | 149,878    |  | $              | 97,404 |  | $ | 149,852
|Series B Redeemable Nonconvertible Participating Preferred Stock |  | $              | 2,433   |                | $ | 7,793      |  |                | N/A    |  |   | N/A    



|(19) | Segment Reporting
|---- | -----------------



For financial reporting purposes, the Company has classified its operations into two reporting segments that correspond with the manner in which such
operations are managed: the Medical Transportation and Related Services Segment and the Fire and Other Segment. Each reporting segment consists of cost centers (operating segments) representing the Companys various service areas that have been
aggregated on the basis of the type of services provided, customer type and methods of service delivery.



The Medical Transportation and Related Services Segment includes emergency ambulance services provided to individuals pursuant to contracts with counties,
fire districts, and municipalities, as well as non-emergency ambulance services provided to individuals requiring either advanced or basic levels of medical supervision during transport. The Fire and Other Segment includes a variety of fire
protection services including fire prevention, suppression, training, alarm monitoring, dispatch, fleet and billing services.



90



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The accounting policies described in Note 1 to the consolidated financial statements have also been
followed in the preparation of the accompanying financial information for each reporting segment. For internal management purposes, the Companys measure of segment profitability is defined as income (loss) before interest, income taxes,
depreciation and amortization. Additionally, segment assets are defined as consisting solely of accounts receivable. The following tables summarize the information required to be presented by SFAS 131, Disclosures about Segments of an Enterprise and
Related Information (in thousands):



|                                     |  |                                             |         |               |   |        |  |   |        
|------------------------------------ |  | ------------------------------------------- | ------- | ------------- | - | ------ |  | - | -------
|                                     |  | Medical Transportation and Related Services |         | Fire andOther |   | Total 
|Year ended June 30, 2003             |  |                                             |         |               |   |        |  |   |        
|Net revenues from external customers |  | $                                           | 442,076 |               | $ | 78,401 |  | $ | 520,477
|Segment profit (loss)                |  | $                                           | 48,723  |               | $ | 8,206  |  | $ | 56,929 
|Segment assets                       |  | $                                           | 58,782  |               | $ | 1,646  |  | $ | 60,428 



|                                     |  |                                             |         |               |   |        |  |   |        
|------------------------------------ |  | ------------------------------------------- | ------- | ------------- | - | ------ |  | - | -------
|                                     |  | Medical Transportation And related Services |         | Fire andOther |   | Total 
|Year ended June 30, 2002             |  |                                             |         |               |   |        |  |   |        
|Net revenues from external customers |  | $                                           | 416,813 |               | $ | 72,167 |  | $ | 488,980
|Segment profit (loss)                |  | $                                           | 50,828  |               | $ | 6,633  |  | $ | 57,651 
|Segment assets                       |  | $                                           | 62,867  |               | $ | 1,594  |  | $ | 64,461 



|                                     |  |                                             |         |   |               |   |        |  |   |         |  
|------------------------------------ |  | ------------------------------------------- | ------- | - | ------------- | - | ------ |  | - | ------- | -
|                                     |  | Medical Transportation and Related Services |         |   | Fire andOther |   | Total  | 
|Year ended June 30, 2001             |  |                                             |         |   |               |   |        |  |   |         |  
|Net revenues from external customers |  | $                                           | 408,205 |   |               | $ | 71,209 |  | $ | 479,414 |  
|Segment profit (loss)                |  | $                                           | (71,099 | ) |               | $ | 9,224  |  | $ | (61,875 | )
|Segment assets                       |  | $                                           | 69,013  |   |               | $ | 1,124  |  | $ | 70,137  |  



A reconciliation of
segment profit (loss) to income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle is as follows (in thousands):



|                                                                                                                              |  |      |         |   |                |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | -------------- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                              |  | 2003 |         |   | 2002           |   |         | 2001 | 
|                                                                                                                              |  |      |         |   | (As Restated*) |  
|Segment profit (loss)                                                                                                         |  | $    | 56,929  |   |                | $ | 57,461  |      |  | $ | (61,875  | )
|Unallocated corporate overhead                                                                                                |  |      | (17,487 | ) |                |   | (17,776 | )    |  |   | (19,902  | )
|Depreciation and amortization                                                                                                 |  |      | (13,289 | ) |                |   | (16,267 | )    |  |   | (25,741  | )
|Interest expense                                                                                                              |  |      | (28,012 | ) |                |   | (25,462 | )    |  |   | (30,624  | )
|Interest income                                                                                                               |  |      | 197     |   |                |   | 644     |      |  |   | 642      |  
|                                                                                                                              |  |      |         |   |                |   |         |      |  |   |          |  
|Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting |  | $    | (1,662  | ) |                | $ | (1,400  | )    |  | $ | (137,500 | )
|                                                                                                                              |  |      |         |   |                |   |         |      |  |   |          |  



91



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A reconciliation of segment assets to total assets is as follows (in thousands):



|                            |  |      |         |                |   |         |  |   |        
|--------------------------- |  | ---- | ------- | -------------- | - | ------- |  | - | -------
|                            |  | 2003 |         | 2002           |   | 2001   
|                            |  |      |         | (As Restated*)
|Segment assets              |  | $    | 60,428  |                | $ | 64,461  |  | $ | 70,137 
|Cash                        |  |      | 12,561  |                |   | 10,677  |  |   | 9,743  
|Inventories                 |  |      | 11,504  |                |   | 12,220  |  |   | 13,173 
|Prepaid expenses and other  |  |      | 8,498   |                |   | 7,231   |  |   | 4,430  
|Property and equipment, net |  |      | 43,010  |                |   | 48,532  |  |   | 57,999 
|Goodwill                    |  |      | 41,167  |                |   | 41,244  |  |   | 90,757 
|Other assets                |  |      | 12,048  |                |   | 8,115   |  |   | 14,031 
|Insurance deposits          |  |      | 6,950   |                |   | 8,228   |  |   | 3,736  
|                            |  |      |         |                |   |         |  |   |        
|                            |  | $    | 196,166 |                | $ | 200,708 |  | $ | 264,006
|                            |  |      |         |                |   |         |  |   |        



|* | Refer to Note 2 Restatement of Consolidated Financial Statements.
|- | -----------------------------------------------------------------



|(20) | Related Party Transactions
|---- | --------------------------



The Company incurred legal fees of approximately $16,000, $138,000 and $130,000 in fiscal 2003, 2002 and 2001, respectively, with a law firm in which a
member of the Board of Directors is a partner.



The Company
incurred rental expense of approximately $69,000 in fiscal 2003, 2002 and 2001 related to leases of fire and ambulance facilities with a director of the Company.



The Company incurred consulting fees of approximately $89,000, $89,000 and $99,000 in fiscal 2003, 2002 and 2001,
respectively, with a director of the Company.



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|ITEM 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



On July 7, 2003, Rural/Metro Corporation, a Delaware corporation (the
Company) engaged Singer Lewak Greenbaum and Goldstein LLP (SLGG) as its independent accountants solely to re-audit the Companys financial statements for fiscal 2001. Those financial statements were previously audited by
the Companys prior independent accountants, Arthur Andersen LLP, who have ceased operations and were, therefore, unable to perform any procedures with respect to those financial statements. As reported in the Companys Current Report on
Form 8-K dated January 2, 2002, the Companys relationship with Arthur Andersen LLP was terminated as of January 2, 2002. The Companys financial statements for fiscal 2001 required re-audit as a result of restatement adjustments related
to (i) the provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in prior years, (ii) the deferral of enrollment fees charged to new subscribers under our fire protection service
contracts and to recognize such fees over the estimated customer relationship period, (iii) the consolidation of the Companys investment in San Diego Medical Services Enterprise, LLC in connection with the Companys adoption of Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 and (iv) the disposal of the Companys Latin American operations, the results of which were reclassified
to discontinued operations for all periods presented. As Arthur Andersen LLP had ceased operations, the Company engaged SLGG to perform the re-audit of the fiscal 2001 financial statements. The engagement of SLGG for this project was approved by the
Audit Committee of the Companys Board of Directors.



The
Company did not consult with SLGG during the fiscal years ended June 30, 2002 and 2001 or during the subsequent interim period from July 1, 2002 through and including the engagement date of July 7, 2003, on (i) either the application of accounting
principles or the type of opinion SLGG might issue on the Companys financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) or a reportable event as defined in Item 304(a)(1)(v) of
Regulation S-K.



The engagement of SLGG to perform the fiscal
2001 re-audit does not affect the Companys ongoing engagement of PricewaterhouseCoopers LLP (PwC) as the Companys independent accountant. PwC has served as the Companys independent accountants for the fiscal years ended
June 30, 2002 and June 30, 2003.



|ITEM 9A. | Controls and Procedures
|-------- | -----------------------



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (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
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls
and procedures, which, by their nature, can provide only reasonable assurance regarding managements control objectives.



During the third quarter of fiscal 2003, we determined that our accounts receivable balance was materially overstated and that our net revenue and
provision for doubtful accounts applicable to prior periods also required adjustment. The fact that our internal controls did not identify the related financial statement errors prior to that time is considered to represent a material weakness as
defined under standards established by the American Institute of Certified Public Accountants. As a result of these matters, we determined that our consolidated financial statements for years prior to fiscal 2003 required restatement. See Note 2 to
our Consolidated Financial Statements.



We have taken the steps
necessary to strengthen our internal controls to address this situation. We have completed extensive analyses and have instituted new procedures relating to the evaluation of the adequacy of our allowance for doubtful accounts, including the
enhanced utilization of historical collection experience within each of our service areas, as well as the involvement of representatives of the accounting, finance and billing departments in the evaluation process. As of the date of this report, we
believe the actions implemented have corrected the material weakness in the internal controls discussed in the preceding paragraphs.



93



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During the second quarter of fiscal 2004, certain items relating to prior periods were called to our
attention and evaluated by us for further reporting under the Exchange Act. As a result of this process, we have filed (or will file in the near future)



| | (i) | Current Reports on Form 8-K reporting under Item 4 the engagement in July 2003 of Singer Lewak Greenbaum and Goldstein LLP (SLGG) as the Companys independent
accountants to re-audit the Companys financial statements for fiscal 2001, and the completion of such engagement in October 2003. The Companys financial statements for fiscal 2001 were previously audited by the Companys prior
independent accountants, Arthur Andersen LLP, who have ceased operations, and therefore, were unable to perform any procedures with respect to those financial statements. SLGGs report and consent were included in our Annual Report on Form 10-K
for fiscal 2003.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | A Current Report on Form 8-K reporting under Item 2 the cessation of operations in certain of the Companys medical transportation and related service areas effective September
30, 2003. The results of the closed service areas referred to above were classified as discontinued operations in the financial statements included in the Companys Quarterly Report on Form 10-Q for the three months ended September 30, 2003.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | This amendment to our Annual Report on Form 10-K for fiscal 2003 restating our earnings per share calculations and related disclosures for fiscal 2003. The Company initially
concluded that it had calculated its earnings per share amounts for fiscal 2003 in the appropriate manner. However, the Company subsequently determined that such calculations should have been made using the two-class method whereby net income or
loss for each period is allocated between common stock and the Companys Series B redeemable nonconvertible participating preferred stock on the basis of the weighted average number of common shares and share equivalents outstanding during the
period. The need to restate our fiscal 2003 earnings per share calculations and related disclosures is considered to represent a material weakness under standards established by the American Institute of Certified Public Accountants. The Company has
added resources in the accounting and reporting area to prevent this type of situation from recurring.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We carried out an evaluation as of June 30, 2003, under the supervision and with the participation of management, including the Chief Executive Officer
along with the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Chief Executive Officer along with the Chief Financial
Officer concluded that our disclosure controls and procedures are effective, except for the items outlined in the preceding paragraphs which were subsequently identified and have been addressed as set forth above. Other than the internal control
matters discussed in the preceding paragraphs, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation.



94



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|ITEM 15. | Exhibits
|-------- | --------



| | (c) | Exhibits
| | --- | --------



|     |  |                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------
|     | 
|23.1 |  | Consent of PricewaterhouseCoopers LLP*                                                                              
|     | 
|23.2 |  | Consent of Singer Lewak Greenbaum & Goldstein, LLP*                                                                 
|     | 
|31.1 |  | Certification Pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*            
|     | 
|31.2 |  | Certification Pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*            
|     | 
|32.1 |  | Certification Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|     | 
|32.2 |  | Certification Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

---

|* | Filed herewith.
|- | ---------------





---

SIGNATURES



Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



RURAL/METRO CORPORATIONBy:

/s/    JACK E. BRUCKERJack E. Brucker President and Chief Executive Officer




March 4, 2004



96