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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

|(Mark One)                              |                                                                                   
|--------------------------------------- | ----------------------------------------------------------------------------------
|ý                                       | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended June 30, 2003
|o                                       | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-29478

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PRECISION AUTO CARE, INC.(Name of small business issuer in its charter)

|Virginia(State or other jurisdiction of
incorporation or organization)                              |  | 54-1847851(I.R.S. Employer
Identification Number)
|--------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|748 Miller Drive, S.E., Leesburg, Virginia 20175(Address of principal executive offices)
(Zip Code)
|703-777-9095(Issuer's telephone number, including area code)                                       
|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 

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Check
whether the issuer (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. ýYes    o No

Check
if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. o

The
issuer's revenues for its most recent fiscal year were: $11,936,884.

The
aggregate market value of Common Stock held by persons not "affiliated" with the issuer at September 4, 2003 was $3,404,549 based on the closing price of $0.75 per share. As
of September 4, 2003, 16,558,833 of Common Stock were issued and outstanding.

Transitional
Small Business Disclosure Format: o Yes    ý No

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of Registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the close of the Corporation's fiscal year, are incorporated by reference under Part III.

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TABLE OF CONTENTS

|         |  |          |  |                                                                                      |  | Page
|-------- |  | -------- |  | ------------------------------------------------------------------------------------ |  | ----
|PART I   |  | Item 1.  |  | Business                                                                             |  | 4   
|         |  | Item 2.  |  | Properties                                                                           |  | 13  
|         |  | Item 3.  |  | Legal Proceedings                                                                    |  | 13  
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  |  | 15  
|PART II  |  | Item 5.  |  | Market for Common Equity and Related Stockholder Matters                             |  | 16  
|         |  | Item 6.  |  | Management's Discussion and Analysis or Plan of Operation                            |  | 16  
|         |  | Item 7.  |  | Financial Statements                                                                 |  | 22  
|         |  | Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |  | 45  
|PART III |  | Item 9.  |  | Directors and Executive Officers of the Registrant                                   |  | 46  
|         |  | Item 10. |  | Executive Compensation                                                               |  | 46  
|         |  | Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 46  
|         |  | Item 12. |  | Certain Relationships and Related Transactions                                       |  | 46  
|         |  | Item 13. |  | Exhibits and Reports on Form 8-K                                                     |  | 46  
|         |  | Item 14. |  | Controls and Procedures                                                              |  | 48  

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FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934.
When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend" and "plan" as they relate to Precision Auto Care, Inc. or its management are intended to identify
such forward-looking statements. All statements regarding Precision Auto Care, Inc. or Precision Auto Care, Inc.'s expected future financial position, business strategy, cost savings and
operating synergies, projected costs and plans, and objectives of management for future operations are forward-looking statements. Although Precision Auto Care, Inc. believes the expectations
reflected in such forward-looking statements are based on reasonable assumptions, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, the factors set forth under the caption "BusinessRisk
Factors," general economic and business and market conditions, changes in federal and state laws, and increased competitive pressure in the automotive aftermarket services business.

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PART I

Item 1.Business

OVERVIEW

Precision Auto Care, Inc. ("PACI" or the "Company") is a franchisor of automotive service centers located in the United States and in certain foreign
countries. At June 30, 2003, the Company had 32 employees. Through its franchised centers, services are provided to automobile owners and focus on those high frequency items required on a
periodic basis to maintain the vehicle properly.

The
Company was incorporated as a Virginia corporation in April 1997, but its predecessors have been in the automotive maintenance services business since 1976. The first
Precision Tune was established in 1976 to provide quick, convenient and inexpensive engine tune-ups. Franchising of Precision Tune centers began the next year. As automotive technology
changed, Precision Tune expanded its menu of offered automotive maintenance services to include oil changes, fuel injection service, air conditioning service, cooling system service, brake service and
more diagnostic services. In September 1996, the Precision Tune brand name was changed to Precision Tune Auto Care to reflect the shift in emphasis.

The
Company is the result of the November 1997 combination of WE JAC Corporation (the owner of Precision Tune Auto Care) and nine other automotive maintenance services companies
in connection with its initial public offering. In March 1998, the Company acquired the holder of the master franchise agreement for Precision Tune Auto Care in Mexico and Puerto Rico. The
Company's Mexican assets were sold in January 2002. In March and April 2003, the Company disposed of its manufacturing operations. See Notes to Financial Statements for financial
information regarding the disposal of the Company's Manufacturing and Distribution business segment.

The
Company has one remaining business segment, Automotive Care Franchising. The Automotive Care Franchising business segment, which is comprised of Precision Tune Auto Care ("PTAC") and
Precision Lube Express, provides automotive services primarily through franchised operations located in the United States and in certain foreign countries.



OPERATIONS

Precision Tune Auto Care

Precision Tune Auto Care is a franchisor of automotive service centers that provide specialized quality maintenance services that require relatively short service
times. The automotive care services provided by Precision Tune Auto Care centers include the diagnosis, maintenance and repair of ignition systems, fuel systems, computerized engine control systems,
cooling systems, starting/charging systems, emissions control systems, engine drive train systems, electrical systems, air conditioning systems, oil and other fluid systems, and brake systems.

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Prototype Center.The current prototype Precision Tune Auto Care center is a free-standing building with six to
eight service bays, of which two to four are drive-through and include pits to facilitate fast oil change and lubrication services. Franchisees typically develop Precision Tune Auto Care centers
either by entering into a build-to-suit lease, under which the landlord constructs the center and leases it to the franchisee, or by purchasing land and building the facility.
The Company typically seeks sites in commercial areas with a minimum population of 50,000 people within a five mile radius and 24-hour drive-by traffic of at least 20,000 cars.
Exclusive of real estate, the estimated capital required to open a prototype Precision Tune Auto Care center ranges from $137,700 to $208,100.

Retail Marketing.Precision Tune Auto Care's marketing objectives at the retail level are to increase franchisee sales,
enhance first-time customers' experiences, and bolster each franchisee's customer retention efforts. To further these objectives, Precision Tune Auto Care has developed and implemented a
marketing plan containing programs and materials for use by Precision Tune Auto Care centers. The plan includes targeted marketing programs designed to reach key market segments, in-store
merchandising materials designed to enhance retail sales and first time customer trials, and other local marketing materials (e.g., second car discounts, service reminder cards, and ATM receipt
coupons) designed to generate customers and improve customer retention.

Training and Operational Support.A significant element of Precision Tune Auto Care's commitment to service is its training
program for franchisees. New franchisees are required to successfully complete
over 40 hours of initial training at its national training center in Leesburg, Virginia. The Company also offers a full line of technical training, including courses on engine performance, fuel
systems and emissions, automotive electronics, fuel injection, and brake certification. These courses, which include both classroom and hands-on training, are designed to allow franchisees
and service center technicians to maintain and update their technical capability to service today's more technically complex vehicles. Upon opening a new center, training crews are onsite for at least
the first two business days to assist in the startup process.

Franchise Marketing.The Company (through a predecessor company) has marketed franchises for Precision Tune Auto Care centers
since 1977. Its franchise sales process includes advertising in appropriate franchise and business publications, establishing relationships and working with sales brokers, conducting franchise sales
seminars, maintaining a home page on the Internet through which interested parties may submit a franchise inquiry, and advertising on several franchise sales orientated web sites. Prospective
franchisees are asked to complete a Confidential Qualifications Report, which serves as the initial screening to determine whether a prospect is qualified. The Company seeks individuals with
management experience who will commit full time to the operation of their franchise and who have a minimum of $70,000 and $200,000 in liquid assets and net worth, respectively.

Precision
Tune Auto Care's area development system has played a significant role in its franchise development efforts. Under this system, Precision Tune Auto Care has entered into area
development agreements that grant area developers the right and obligation to develop franchises on Precision Tune Auto Care's behalf within specific geographic regions for stated periods of time.
Franchise agreements within the area are between the Company and the franchisee. The area developer typically receives up to one-half of the initial franchise fee, one-half of
the subsequent royalty revenues and one-half of franchise renewal and transfer fees. After the creation of a franchise, the area developer performs most of Precision Tune Auto Care's
franchise obligations. As of June 30, 2003, 21 area developers and their affiliates had an ownership interest in approximately 30% of the total number of Precision Tune Auto Care centers.

Open Area Development.Precision Tune Auto Care's current strategy is also to pursue the direct development of open areas in
which area developers have not been granted rights. To facilitate this strategy, the Company has formed a franchise development team to pursue Precision Tune Auto Care's open area development plan.
This plan, which includes direct franchising, addresses such factors as

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market
demographics, development resources (e.g., advertising and public relations vehicles and developers of commercial real estate), criteria for initial center development, and criteria for
additional center development. Based on these factors, a specific expansion strategy for each target area is developed. The Company believes that significant expansion potential exists in areas not
controlled currently by area developers.

Precision Lube Express

Precision Lube Express franchisees and licensees provide convenient fast oil change and lube services. In the future, the Company will not be selling Precision
Lube Express franchises. However, the Company intends to grow this part of the business primarily through its co-branding relationship with Petro USA, Inc., a subsidiary of Getty
Petroleum Marketing, Inc., and potential co-branding relationships with other petroleum retailers.

Precision
Lube Express centers provide fast automobile oil changes, lubrication, filter replacement and related basic services. These centers also check and fill vital fluids, and
conduct vehicle safety inspections, including inspection of exhaust systems. Precision Lube Express offers its customers air filters, PCV valves, breather filters, wiper blades and assorted engine
additives. Precision Lube Express centers top off vital fluids between customer's oil changes at no charge.

Unlike
certain of its competitors, Precision Lube Express centers generally do not perform differential fluid changes, radiator flushes or other automotive maintenance or repair work.
Accordingly, the Company believes that this enables Precision Lube Express operators to provide services more inexpensively than their competitors because Precision Lube Express operations require
less skilled labor.

FRANCHISING ACTIVITIES

Precision Tune Auto Care.As of June 30, 2003, all of Precision Tune Auto Care domestic and international centers were
owned and managed by franchisees. Precision Tune Auto Care's franchises have been sold during the preceding years under franchise agreements that vary in detail as the Precision Tune Auto Care's
franchise program has evolved. Royalty rates in existing franchise arrangements range from 6% to 7.5%. Currently, Precision Tune Auto Care's standard franchise agreement requires payment to the
Company of an initial franchise fee of $25,000 and a continuing royalty of 7.5% of weekly gross receipts. In addition, the franchisee is required to contribute to or expend up to 9% of weekly gross
receipts on advertising, up to 1.5% of which is currently paid into the national advertising fund and up to 7.5% of which is spent locally. The current standard form franchise agreement has an initial
term of ten years and provides for five-year renewal options.

The
Company has implemented a program under which qualified franchisees are eligible to have their royalty rate reduced to 6% if they satisfy certain criteria. Under the program,
franchisees are also provided with an incentive to purchase additional Precision Tune Auto Care franchises. Any franchisee that has owned and operated a center for at least one year in accordance with
this program will be charged an initial franchise fee of $15,000 for a second franchise and $10,000 for each additional franchise purchased, provided certain conditions are met.

Under
its current form of franchise agreement, the Company has a continuing obligation to provide technical and administrative support, supervisory services, centralized marketing
support, and training and related support to its franchisees. In certain regions, the Company has delegated these duties to area developers under its area developer system.

Upon
non-renewal and transfer, the Company has the first right to purchase the operating assets and obtain an assignment of leased facilities in certain cases. In certain
situations, the Company will repurchase franchise rights. The decision to repurchase is made solely at its discretion and is not a

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contractual
obligation. The Company also periodically obtains possession of some franchisees' franchise rights by exchanging for such rights notes payable or other consideration, or by exercising
rights outlined in the franchise agreements.

The
Company also enters into master franchise agreements to develop international markets. At the present time, the Company has master franchise agreements in Taiwan, Indonesia, United
Arab Emirates, the Bahamas, Jamaica, the Dominican Republic, Peru, Brazil, El Salvador, Ecuador, Guatemala, Honduras, Saudi Arabia and Portugal. Generally, the master franchisee pays a license fee and
is required to develop Precision Tune Auto Care centers in accordance with an agreed upon schedule within the defined area. Franchise agreements within the area are between the master franchisee and
the unit franchisee. The master franchisee is required to perform all of the obligations of the franchisor including training, administrative and operational support, and the Company generally
receives 20% of the initial franchise fee and up to one-third of ongoing royalty fees.

CO-BRANDING

On March 20, 2000, the Company entered into an agreement with Petro USA, Inc., a subsidiary of Getty Petroleum Marketing, Inc., to provide
Getty's dealers with the opportunity to host a Precision Tune Auto Care franchise or Precision Lube Express franchise. This co-branding program involves a planned association of two
distinct brands, which are typically associated with different business concepts. At June 30, 2003, there were eight Getty stores that were hosting Precision Tune Auto Care centers and one
Getty store that was hosting a Precision Lube Express center.

The
Company is seeking to enter into other similar alliance agreements or other related agreements, where its franchised businesses will be the secondary tenant at the primary tenant's
location. The co-branding program may have separate agreements with the primary tenant's organization or its affiliates to assist Precision Tune Auto Care in the offer of franchises to the
primary tenants and the provision of services. The Company expects that these co-branding
opportunities will be with other providers of automotive services not similar to its own, like gasoline stations, detail, paint and body work stations, tire shops, glass shops, and muffler shops. Due
to the nature of these co-branding relationships, the Company expects to modify its standard form of franchise agreement to reflect the differences or similarities between its businesses.
Some of these primary tenants may be in direct competition with the Company and may choose not to franchise their particular location. Additionally, the Company makes the final decision as to entering
into a franchise agreement with a primary tenant.

COMPETITION

The Company's franchisees and licensees encounter competition in all aspects of their business, including the sale by Precision Tune Auto Care and Precision Lube
Express centers of automotive maintenance and repair services and fast oil and lubrication services. The Company believes that automobile dealerships, including recently emerging national and regional
new and used auto dealerships, represent Precision Tune Auto Care's principal competitors. Other Precision Tune Auto Care competitors include tire companies and regional
under-the-hood service specialists. National competitors within Precision Tune Auto Care's market include Sears Auto Center and the automotive maintenance centers operated by
Goodyear, Firestone and Penske, among others. Its regional competitors include All Tune and Lube (East Coast), Econo Lube N' Tune (West Coast), Tunex International, Inc. (Rocky Mountain
region), Tune-Up Masters and Speedee Oil Change and Tune-Up (Southern region), among others. The Company believes that the greater technical complexity of today's vehicles
provides a substantial barrier to entry for competitors in the "under-the-hood" segment of the automotive care services industry.

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Precision
Lube Express franchisees and licensees also compete in the service segment of the automotive aftermarket industry. This oil change market consists of all types of automotive
aftermarket outlets including fast oil change and lubrication facilities such as those operated by the Company, car dealerships, and gasoline stations. On a national level, Precision Lube Express
competes with a number of major oil manufacturers dominating the fast lube market. These include Pennzoil/Quaker State Company (Jiffy Lube International, Inc. and
Q-Lube Inc.), Valvoline Company/Ashland Oil Inc. and Texaco Inc. (Express Lube), among others. In addition, Precision Lube Express competes with regional fast oil and
lubrication operations including All Tune and Lube, Econo Lube N' Tune, Tunex International Inc. and Speedee Oil Change and Tune-Up, among others.

The
Company believes that the Precision Tune Auto Care and Precision Lube Express centers all compete on the basis of customer awareness through advertising, service, convenience and
location and, to a lesser extent, on price. The Company believes that the potential ability to offer all of the services provided by each of the operations at one center or in centers in close
proximity to one another will be a significant competitive advantage.

GOVERNMENT REGULATION

Franchising Regulation.The Company is subject to federal, international and state laws and regulations, including the
regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the
franchisor/franchisee relationship. From time to time, the Company experiences periods during which sales are restricted while it registers updates of its disclosure material with various states. Such
delays may have an adverse effect on its ability to offer and sell franchises. In addition, the Company may become subject to litigation with, or other claims filed with state, federal or
international authorities by, franchisees or area developers based on alleged unfair trade practices, implied covenants of good faith and fair dealing or express violations of agreements. The failure
by the Company to comply with these laws could subject the Company to liability to franchisees and to fines or other penalties imposed by governmental authorities and could have a material adverse
effect on its financial condition and results of operations.

Environmental Regulation.Precision Tune Auto Care and Precision Lube Express centers store new oil and handle large
quantities of used automotive oils and fluids. As a result of these activities, the Company, its franchisees and area developers are subject to various federal, state and local environmental laws and
regulations dealing with the transportation, storage, presence, use, disposal and handling of hazardous materials and hazardous wastes, and underground fuel storage tanks. If any such substances were
improperly released or improperly stored on its property or the property of any franchisee, including leased properties, or if the Company were found to be in violation of applicable environmental
laws and regulations, the Company could be responsible for clean-up costs, property damage and fines or other penalties, any one of which could have a material adverse effect on its
financial condition and results of operations.

TRADEMARKS

The Company has registered a number of trademarks and service marks with the United States Patent and Trademark Office, including "Precision Tune Auto Care." Its
failure to obtain and maintain trademark and service mark registration could have a material adverse effect on its operations. The Company has also registered or made application to register
trademarks in foreign countries where master franchise licenses have been granted.

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SEASONALITY

Seasonal changes may impact various sectors of its businesses and, accordingly, its operations may be adversely affected by seasonal trends in certain periods. In
particular, severe weather in winter months may make it difficult for consumers in affected parts of the country to travel to Precision Tune Auto Care and Precision Lube Express and obtain services.

RISK FACTORS

The Company's business and investment in its Common Stock are subject to certain risks, including the following:

Limited Operating History.The Company is in only its sixth year of operations as a combined entity. While its predecessor
has been in business since 1976, the Company, as currently constituted, acquired the majority of its assets in November 1997 as the result of a combination of 10 automotive service companies in
connection with its initial public offering. Management is focusing its efforts on improving the Company's financial performance by focusing on the franchising business and controlling operating
costs. However, there can be no assurance that the Company will be able to implement these plans successfully.

Stock Listing.The Company's common stock trades on the National Association of Securities Dealers, Inc.'s OTC
Bulletin Board. Like other stocks traded over this quotation system, its common stock is thinly traded, highly volatile and not followed by analysts.

Penny Stock Regulations.The Company's common stock is subject to the rules promulgated under the Securities Exchange Act of
1934, as amended, relating to "penny stocks." These rules require brokers selling securities subject to these rules to persons other than established customers and institutional accredited investors
to complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning the risks of trading in the security. These rules may restrict the
ability of brokers to sell the Company's common stock and thus may have an adverse effect on the liquidity and market price of its common stock.

Resale Restrictions on Common Stock.Because of large broker-dealer spreads, investors may be unable to sell the stock
immediately back to the broker-dealer at the same price the broker-dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. The market among broker-dealers may not be
active, making it more difficult for investors to sell this stock. Investors in a penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or
commissions charged by the broker-dealers may be greater than any profit a seller may make.

Penny Stock Market.Shareholders should be aware that, according to Securities and Exchange Commission Release
No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse which could cause investors to lose their entire investment. Such patterns
include:



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The
Company's management is aware of the abuses that have occurred historically in the penny stock market. Although it does not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, it will strive within the confines of practical limitations to prevent the described patterns from being established with respect to its securities.

Competition.The automotive services industry is highly competitive. The Company believes that automobile dealerships,
including recently emerging national and regional new and used auto
dealerships, represent the principal competitors for Precision Tune Auto Care and Precision Lube Express service centers; however, these service centers also compete with national and regional fast
oil change and lube companies, major oil manufacturers, local service stations and local, regional and national automobile maintenance and repair service providers.

The
Company believes the principal competitive factors in the markets serviced by each of its business units are location, name recognition and reputation, and quality of service and
price.

The
Company also competes with some of those noted above and with other parties in the sale of franchises. Competitive factors include startup costs, royalty rates, franchisee support
and the financial performance of existing centers. With respect to the sales of supplies and equipment for franchisees, competition is based on availability, price, ability to provide prompt delivery
and the quality of support services.

Certain
competitors discussed above have greater financial resources than the Company does. There can be no assurance that the Company or individual Precision centers will be able to
compete effectively.See "BusinessCompetition."

Reliance on Franchising.Franchise royalties are a significant component of its revenue base. Therefore, the Company depends
upon the ability of its franchisees to promote and capitalize upon the "Precision" brand and the reputation the Company believes the Company enjoys for quality and value. There can be no assurance
that the Company or our area developers will be able to recruit and retain franchisees with the business abilities or financial resources necessary to open Precision Tune Auto Care centers on schedule
or that the franchisees will conduct operations profitably. In addition, to the extent that franchisees finance their operations with secured indebtedness, the Company's rights to receive franchise
royalties would be effectively subordinated to the rights of franchisees' lenders.See "BusinessOperations."

Automotive Technology Advances.The demand for the services offered by its Precision Tune Auto Care and Precision Lube
Express centers could be adversely affected by continuing developments in automotive technology. Automotive manufacturers are producing cars that last longer and require service and maintenance at
less frequent intervals. For example, some manufacturers now recommend that consumers change oil at 10,000 mile intervals and replace spark plugs and other engine components at 100,000 miles, a
significant increase from the mileage intervals recommended for earlier models and those currently recommended by most manufacturers. The demand for its services also could be adversely affected by
longer and more comprehensive warranty programs offered by automobile manufacturers and other third parties. The Company believes that a majority of new automobile owners have their cars serviced by a
dealer during the period the car is under warranty. In addition, advances in automotive technology may require the Company to incur additional costs to update its technical training program and
upgrade the diagnostic capabilities of its centers.

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Labor Availability.The provision of high quality maintenance services by Precision Tune Auto Care centers requires an
adequate supply of skilled labor. In addition, the operating costs and operating revenues of such centers may be adversely affected by high turnover in skilled technicians. Trained and experienced
automotive technicians are in high demand. Accordingly, a center's ability to increase productivity and revenues could be affected by its inability to maintain the employment of skilled technicians
necessary to provide the center's services. There can be no assurance that Precision Tune Auto Care or its franchisees will be able to attract and maintain an adequate skilled labor force necessary to
operate these centers efficiently or that labor expenses will not increase as a result of a shortage in the supply of skilled technicians, thereby adversely impacting its financial performance.

Dependence on Management and Key Personnel.The Company's success depends to a significant extent on the performance and
continued services of senior management and certain key personnel. The Company believes these individuals possess the necessary experience in financing, operating and managing a company intent on
improving its financial performance. The loss of the services of one or more of these key employees could have a material adverse impact on its financial condition and results of operations.

Reliance on Area Developers.The Company relies, in part, on the assistance of area developers to identify and recruit
franchisees, to assist in the development of a center, and to support franchisees' continuing operations. Most area development agreements specify a schedule for opening the respective "Precision"
centers in the territory covered by the agreement. In the past, the Company has selectively agreed to extend or waive the development schedules for certain of our area developers and there can be no
assurance that area developers will be able to meet their contractual development schedules. Although the Company also has added the resources to franchise directly in open areas, the development
schedules of its area developers will remain a part of the basis of its expectations regarding the number and timing of new center openings.

The
Company will depend on its area developers to work with the Company as the Company tries to expand its co-branding relationship with Getty Petroleum Marketing and other
potential co-branding relationships in their territories. The Company has encountered some resistance from certain area developers to the introduction of the co-branding
relationship in their areas. Certain area developers are concerned that a co-branding relationship will hurt sales in their area for the stores under their purview.

Management
believes that the Company has substantially resolved these concerns. However, there can be no assurance that the Company will not become subject to legal proceedings or
otherwise expend its resources in connection with disputes concerning its ability to offer and sell Precision Tune Auto Care franchises in areas covered by Precision Tune Auto Care area
sub-franchise agreements.
It also may be difficult for the Company to enforce its area sub-franchise agreements or to terminate the rights of area sub-franchisees who fail to meet development schedules
or other standards and requirements imposed by the Company, limiting its ability to develop the territories of such sub-franchisees. Any such disputes or difficulties could increase the
costs of its operations or otherwise adversely affect its financial condition and results of operations.See "BusinessOperations."

Seasonal Nature of Portions of the Business.Seasonal changes may impact various sectors of its businesses and, accordingly,
its operations may be adversely affected by seasonal trends in certain periods. In particular, severe weather in winter months may make it difficult for consumers in affected parts of the country to
travel to Precision Tune Auto Care and Precision Lube Express centers and obtain services.

Control by Management and Principal Shareholders.As of September 4, 2003, its directors, executive officers and
shareholders beneficially owning more than 5% of its outstanding common stock, in the aggregate, beneficially owned approximately 73% of its outstanding common stock. Accordingly,

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these
persons have substantial influence over its affairs, including the ability to influence the election of directors and appointment of management, the outcome of votes by its shareholders on major
corporate transactions, including mergers and the sales of substantial assets and other matters requiring shareholder approval.

Franchising Regulations.The Company is subject to federal, international and state laws and regulations, including the
regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the
franchisor/franchisee relationship.See "BusinessGovernment Regulation."Its failure to comply with these laws could subject the Company to
liability to franchisees and to fines or other penalties imposed by governmental authorities. From time to time, the Company experiences periods during which sales are restricted while the Company
registers updates of its disclosure material with various states. Such delays may have an adverse effect on its ability to offer and sell franchises. In addition, the Company may become subject to
litigation with, or other claims filed with state, federal or international authorities by, franchisees or area developers based on alleged unfair trade practices, implied covenants of good faith and
fair dealing or express violations of agreements. Accordingly, its failure to comply with applicable franchise laws and regulations could have a material adverse effect on its financial condition and
results of operations.

Environmental Regulation.Precision Tune Auto Care and Precision Lube Express centers store new oil and handle large
quantities of used automotive oils and fluids. Precision Auto Wash centers (which were formerly franchise operations under the PACI umbrella) used chemicals in the washing process. These chemicals,
along with oils, fluids and other chemicals washed off of the vehicle were collected with the waste water from the car wash process. As a result of these activities, the Company, its franchisees and
area developers are subject to various federal, state and local environmental laws and regulations dealing with the transportation, storage, presence, use, disposal and handling of hazardous
materials and hazardous wastes, discharge of storm water, and underground fuel storage tanks. If any such substances were improperly released or improperly stored on its property or the property of
any franchisee, including leased properties, or the Company were found to be in violation of applicable environmental laws and regulations, the Company could be responsible for clean-up
costs, property damage and fines or other penalties, any one of which could have a material adverse effect on its financial condition and results of operations.See
"BusinessGovernment Regulation."

EXECUTIVE OFFICERS OF PRECISION AUTO CARE, INC.

Louis M. Brown, Jr., age 60, became President and Chief Executive Officer on August 4, 2000. He has been
Chairman of Micros Systems, Inc. since January 1987.

Robert R. Falconi, age 49, became Executive Vice President and Chief Operating Officer/Chief Financial Officer in March 2002. From
September 2000 to February 2002, he was the Company's Vice PresidentFinance, Administration and Chief Financial Officer. From August 1998 until September 2000,
he was Chief Financial Officer of Intellisys Technology Corporation. From October 1991 until August 1998, he was Chief Financial Officer of Planning Systems Incorporated.

Frederick F. Simmons, age 41, became Senior Vice President, General Counsel and Secretary in March 2001. From December 1995
to February 2001, he was Assistant General Counsel and Assistant Secretary of Advantica Restaurant Group, Inc.

John T. Wiegand, age 41, became Senior Vice PresidentOperational Programs and Training in March 2002. From
August 2000 to March 2002, he was Senior Vice president of Franchise Operations and from June 1998 to August 2000, he was Vice President of North American Operations.
Mr. Wiegand joined WE JAC Corporation, the Company's predecessor, as Director of Field Operations in August 1996.

12

---

Everett F. Casey, age 56, became Vice President, Assistant General Counsel and Assistant Secretary in March 2002. From
April 2001 to February 2002, Mr. Casey was a legal consultant for the Company. From June 2000 to March 2001, Mr. Casey was Vice President and General Counsel
of the Company. From January 1999 until June 2000, he was an attorney in private practice in Silver Spring, Maryland. From June 1996 to January 1999, he was Vice President
and Deputy General Counsel of Choice Hotels International, Inc.

Kevin Bates, age 41, became Vice PresidentMarketing and Advertising in October 1999. From January 1998 until
October 1999, he was our Director of Field Operations.

Joel Burrows, age 46, became Vice PresidentTraining/Research and Development in September 1999. From
December 1997 until September 1999, he was the PTAC Director of Training/Research and Development.

Glyn D. Massingill, age 57, became Vice PresidentFranchise Services in January 2000. From September 1990
through December 1999, Mr. Massingill was Vice President and General Manager of Precision Automotive Components Manufacturing and Distribution (PAC), a division of the Company.

Douglas V. Krueger, age 32, became Controller in January 2003. From September 2001 until January 2003,
Mr. Krueger was the Assistant Controller of the Company. From September 2000, Mr. Krueger was a financial analyst of the Company. From September 1998 until
September 2000, he was a financial analyst of Intellisys Technology Corporation.

Item 2.Properties

The Company's corporate headquarters are located in approximately 18,000 square feet of leased office space in Leesburg, Virginia pursuant to a lease that expires
in 2009.

In
the opinion of management, the Company's current space is adequate for its operating needs.

Item 3.Legal Proceedings

The Company is subject to litigation that could have a material adverse impact on its liquidity as follows:

Previously Reported Cases:

Transclean Corporation et al. v. Ashland, Inc. et al., U. S. District Court, District of Minnesota, Civil
No. 02-CV-1138-PAM/JGL, Filed July 8, 2002.

Transclean
Corporation and other related parties filed suit against PACI and several other national chains and local auto repair stores alleging that the defendants' use of
T-Tech brand automatic transmission fluid changing equipment manufactured by and purchased from Bridgewood Services, Inc. infringed upon a patent owned by the plaintiffs. The
complaint seeks an unspecified amount of damages, injunctive relief, attorneys' fees and court costs. PACI denies the allegations and is defending the allegations in the lawsuit.

In
August 2003, the parties settled this lawsuit with PACI paying Transclean the sum of $43,500 in full settlement of claims asserted by Transclean and the other plaintiffs.

Lumnivision, S.A. de C.V. v. Praxis Afinaciones, S.A. de C.V., Third Civil Court, First Judicial District, Monterrey, Nuevo Laredo,
Mexico.

Luminivision
filed suit against Praxis Afinaciones, an indirect wholly owned subsidiary of PACI, seeking payment of 766,000 Mexican Pesos, plus interest at the rate of 5% per month, for
services under a contract. Praxis Afinaciones denies the allegations and is defending the allegations in the lawsuit.

13

---

Gulshan Hirji v. Precision Auto Care, Inc., Los Angeles Superior Court, State of California, Case No. BC279492, Filed
August 12, 2002

Gulshan
Hirji, a stockholder of Paisa, Inc. ("Paisa"), filed suit against PACI alleging that PACI breached a contract between PACI and Paisa entered into in June 1998 and
amended in August 1998, and made fraudulent representations and negligent misrepresentations in connection with the alleged contract. The plaintiff seeks damages of $7,000,000, consequential
damages, punitive damages, attorneys' fees, prejudgment interest and such other relief as the Court deems proper. PACI denies the allegations and intends to vigorously defend the allegations in the
lawsuit. PACI seeks a judgment against Gulshan Hirji on her guaranty of a promissory note for $500,000 plus interest and attorneys' fees, and has filed a cross-complaint seeking damages from Hirji in
excess of $1,000,000 based on fraudulent representations made to PACI.

The
case has been consolidated into PACI's suit against Hirji on the note for $500,000. Discovery is just beginning. Mediation is to be completed by November 28, 2003. A
settlement conference is scheduled for January 6, 2004, and trial is scheduled to begin January 20, 2004. There have been no settlement discussions to date.

United Bank, NA v. C. Eugene Deal, Miracle Partners, Inc., Star Auto Center, Inc., Common Pleas Court of Cuyahoga County,
Ohio, Case No. 01-CV0019, Filed January 11, 2001

Miracle
Partners, Inc., a wholly-owned subsidiary of the Company, was party to a confessed judgment of approximately $1.3 million. The subsidiary is currently inactive and
has no assets. As such, management believes this judgment will have no material impact on the Company's consolidated results of operations. Furthermore, the Company believes that it has a meritorious
claim against Mr. Deal for misrepresentations made in connection with PACI's acquisition of Miracle Partners, Inc. in 1997 for all amounts covered by the judgment.

Super Wash Inc. v. Mike Judge, an individual, d/b/a Super Wash fix, d/b/a Wash Pro LLC and Hydro Spray, Case
No. 02-CV-1180, filed in the United States District Court for the Central District of Illinois.

The
plaintiff alleges that it is the owner of a federal trademark "Super Wash", that the defendant Judge has infringed that mark through the use of the name "superwashfix" and that Judge
was acting on behalf of the Company's subsidiary, Hydro Spray Car Wash Equipment Co., Ltd. ("Hydro Spray"). In addition to trademark infringement (both statutory and common law), the plaintiff
has alleged violations of the Lanham Act, the Illinois Uniform Deceptive Trade Practices Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, Tortious Interference and Cyberpiracy
based on alleged use of the term "superwashfix" by Judge. The plaintiff seeks injunctive relief, along with an unspecified amount of monetary damages, costs and reasonable attorneys' fees. Hydrospray
denies that Judge was acting on its behalf, denies that it has committed any of the alleged violations and denies that the plaintiff has been damaged. Discovery has been initiated but not completed.
The case is presently set for trial beginning December 18, 2003. The defendant Judge has admitted limited use of the term "superwashfix" but claims he made no sales in connection therewith and
claims to have immediately ceased all use of the term on demand from the plaintiff.

In
August 2003, the parties settled this lawsuit with Hydro Spray agreeing not to use the trademarks owned by Super Wash and each party agreeing to bear its own legal fees.

Threatened Litigation:

Puyallup Auto Stop Associates, Inc. v. PTW, Inc.: By letter dated July 1, 2003, a landlord has asserted a claim against PTW, Inc., a
subsidiary of the Company, for reimbursement of the costs of remediating environmental contamination to the leased premises during the term of the lease, which costs are alleged to exceed $250,000.
Investigation into the Company's liability is ongoing.

14

---

The
Company and its subsidiaries are subject to other litigation in the ordinary course of business, including contract, franchise and employment-related litigation. In the course of
enforcing its rights under existing and former franchisee agreements, the Company is subject to complaints and letters threatening litigation concerning the interpretation and applicability of these
agreements, particularly in case of defaults and terminations.

The
Company does not believe that any of the above pending legal proceedings will result in material judgments against the Company. There can be no assurance, however, that these suits
will ultimately be decided in its favor. While any of these suits may result in a material judgment against the Company, which could cause material adverse consequences to its operations, the Company
believes that it has adequately reserved for any adverse judgments.

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

None.

15

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PART II

Item 5.Market for Common Equity and Related Stockholder Matters

The Company's common stock, par value $.01 per share ("Common Stock") is publicly traded on the National Association of Security Dealers Inc.'s OTC
Bulletin Board and is quoted under the symbol "PACI."

The
following table sets forth the high and low sales prices on Nasdaq and NASD OTC Bulletin Board for the Common Stock during the fiscal years ended June 30, 2003, and
June 30, 2002, respectively. To date, the Company has not paid any Common Stock dividends and does not anticipate paying any Common Stock dividends in the foreseeable future. These over the
counter market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily represent actual transactions.

Fiscal Year Ended June 30, 2003

Quarter

High

LowFirst

$
0.31

$
0.16Second


0.42


0.17Third


0.32


0.20Fourth


1.01


0.23


Fiscal Year Ended June 30, 2002

Quarter

High

LowFirst

$
0.51

$
0.18Second


0.43


0.19Third


0.36


0.24Fourth


0.36


0.12


As
of September 5, 2003, there were 203 record holders of Common Stock. In addition, there were approximately 1,200 beneficial owners of the Company's Common Stock.

Equity Compensation Plan Information

|Plan category                                              |  | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |  | Weighted average exercise
price of outstanding options,
warrants and rights |  | Number of securities
remaining available for
future issuance
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------
|
|Equity compensation plans approved by security holders     |  | 1,674,200                                                                                   |  | 0.45                                                                        |  | 739,497                                                     
|Equity compensation plans not approved by security holders |  | 0                                                                                           |  | 0                                                                           |  | 0                                                           
|                                                           |  |                                                                                             |  |                                                                             |  |                                                             
|Total                                                      |  | 1,674,200                                                                                   |  | 0.45                                                                        |  | 739,497                                                     
|                                                           |  |                                                                                             |  |                                                                             |  |                                                             

Item 6.Management's Discussion and Analysis or Plan of Operation

Introduction

The following discussion should be read in conjunction with the Financial Statements of the Company and related notes thereto included elsewhere herein.

16

---

Overview

Precision Auto Care is a global franchisor of auto care and quick-lube centers. Company revenues are derived from three primary areas: franchise
development, royalties, and distribution. Franchise development revenues include sales of franchises and master licenses. Royalty revenues are derived from royalty fees paid by individual franchisees
to the Company based on qualified retail sales by the franchisee. Distribution revenues are derived from the sale of automotive related supplies to individual franchisees.

Direct
costs consist of fees paid to area developers for the sale of new franchises and for supporting franchisees on an ongoing basis, other costs associated with directly supporting
the franchise system, and the cost of automotive related supplies. General and administrative expenses include all legal, accounting, general overhead, information technology and corporate staff
expenses. Other income and expense items include interest income and expense which are included within the non-operating income/expense category on the Statement of Operations. Severances,
abandoned acquisitions, early buyout of lease obligations, and sale of assets are included in the operating expenses on the Statement of Operations.

The
Company has one remaining business segment, Automotive Care Franchising, due to the disposal of its manufacturing operations in March and April 2003. See Notes to Financial
Statements for financial information regarding the disposal of the Company's Manufacturing and Distribution business segment. This disposal was accounted for as a discontinued operation resulting in
the reclassification of amounts associated with the manufacturing business in its historical financial statements. The Automotive Care Franchising business segment, which is comprised of Precision
Tune Auto Care ("PTAC") and Precision Lube Express, provides automotive services primarily through franchised operations located in the United States and in certain foreign countries.

The
Company's core auto care and franchising business continues to benefit from an improved focus on unit economics, and in the field training programs. Additionally, the Company is
seeking growth through co-branding. This strategy is designed to permit the Company to partner with other retailers and service providers who are also seeking to improve cash flows through
complementary brands.

Significant Accounting Policies

Revenue Recognition

The Company's royalty revenue is recognized as earned in accordance with the specific terms of each agreement and to the extent no issues involving collection
exist.

Revenue
from the sale of a franchise is recognized upon the opening of the franchised center.

The
Company enters into domestic Area Development agreements and international Master License agreements (Agreements) which grant the area developer and master licensor, respectively,
the right to sell, on the Company's behalf, Precision Tune Auto Care franchises and Precision Lube Express franchises within a specific geographic region. Revenue from the sale of Area Development
agreements is recognized as all material services or conditions related to the sales are satisfied. Revenue from the sale of master licenses is recognized upon signing the Agreement since the Company
is not required to support the international franchises as there is no contractual agreement between the Company and the international franchisees.

Revenue
from the sale of car wash equipment, modular automobile lubrication units, and parts is recognized when such units have been shipped to customers and the Company has performed on
all obligations related to the sale, such as installation and assistance with site development.

17

---

Goodwill and Intangible Assets

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets", which supercedes Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets". This statement addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
Goodwill will cease to be amortized upon the implementation of the statement and companies must test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective
July 1, 2002 and ceased amortizing goodwill of $8.7 million.

This
statement requires that goodwill be tested for impairment annually unless the underlying reporting unit has not changed significantly, the most recent valuation substantially
exceeded the carrying value of goodwill, and events or circumstances have not occurred such that the likelihood of impairment is remote. In June 2002, the Company had a business enterprise
valuation conducted of its automotive care franchising reporting unit. This reporting unit, which is primarily comprised of Precision Tune Auto Care®, provides automotive services
primarily through franchised operations located in the United States and in certain foreign countries. This income approach based valuation considered the nature of the reporting unit's business, the
economic outlook of its industry, underlying assets, financial condition, and future earning capacity. Based on this valuation, it was determined that the fair value of approximately
$9.5 million was in excess of its carrying value of approximately $7.0 million. Management chose not to update its valuation in 2003 based on its judgment that it met the previously
described exception criteria and the Company's operations and financial position have significantly improved since the previous valuation.

Results of Operations

Comparison of the year ended June 30, 2003 to the year ended June 30, 2002

Summary
(in thousands)

Twelve Months Ended June 30,2003

%

2002

%Automotive care franchising revenue

$
11,320

95

$
11,848

88Other


617

5


1,623

12Total revenues

$
11,937

100
%
$
13,471

100
%Automotive care franchising direct cost


6,757

56


7,418

55Other


313

3


1,681

13Total direct cost


7,070

59


9,099

68General and administrative


3,467

29


4,757

35Depreciation expense


410

3


680

5Amortization of franchise rights & goodwill




0


1,369

10Impairment charges




0


2,097

16Other operating expense


11

0


187

1Operating income (loss)


979

9


(4,718
)
(35
)Gain on debt restructuring


10,406

87




0Other


(664
)
(6
)

(1,193
)
(9
)Gain (loss) from discontinued operations


254

2


(1,788
)
(13
)Net income (loss)


10,975

92


(7,699
)
(57
)Preferred stock dividends


43






Net income (loss) applicable to common shareholders

$
10,932

92
%
$
(7,699
)
(57
)%


18

---

Revenue.Total revenues for the year ended June 30, 2003 was $11.9 million, a decrease of approximately
$1.6 million, or 12%, compared with total revenues of $13.5 million for the year ended June 30, 2002.

Automotive
care franchising revenue for the year ended June 30, 2003 was $11.3 million, a decrease of approximately $528,000, or 4%, compared with automotive care revenues
of $11.9 million for the year ended June 30, 2002. This decrease was the result of a decrease in royalty revenues of $374,000, a decrease in franchise development revenues of $42,000,
and a decrease in distribution revenue related to franchise operations of $112,000. The decrease in royalty revenues was the result of a decrease in international royalties of $879,000 resulting from
the Company's sale of its franchise operations in Mexico in January of 2002. This was partially offset by an increase in domestic royalties of $505,000. The decrease in distribution revenues
associated with franchise operations was the result of a decrease in distribution revenues associated with its Mexican subsidiary of $251,000. The decrease in distribution revenues was the direct
result of the Company's sale of its franchise operations in Mexico in January of 2002. This was offset by an increase in distribution revenues associated with domestic franchise operations of
$139,000.

Other
revenue for the year ended June 30, 2003 was $617,000, a decrease of approximately $1.0 million, or 62%, compared to $1.6 million for the year ended
June 30, 2002. This decrease was due primarily to the sale of its company operated stores in Mexico.

Direct Cost.Total direct costs for the year ended June 30, 2003 totaled $7.1 million, a decrease of
$2.0 million or 22%, compared with $9.1 million for the year ended June 30, 2002.

Automotive
care franchising direct costs for the year ended June 30, 2003 totaled $6.8 million, a decrease of $661,000 or 9%, compared with $7.4 million for the year
ended June 30, 2002. This decrease was primarily the result of the Company's sale of its franchise operations in Mexico in January of 2002.

Other
direct costs for the year ended June 30, 2003 totaled $313,000, a decrease of $1.4 million or 81%, compared with $1.7 million for the year ended
June 30, 2002. This decrease was due primarily to the sale its company operated stores in Mexico.

General and Administrative Expense.General and administrative expense was $3.5 million for the year ended
June 30, 2003, a decrease of $1.3 million or 27%, compared with $4.8 million for the year ended June 30, 2002. In the year ended June 30, 2002, the company incurred
legal and accounting costs of approximately $204,000 associated with the sale of the Company's Mexican subsidiary. There were no such costs incurred in the year ended June 30, 2003. Accrued
liabilities were also decreased by $210,000 in the year ended June 30, 2003 based on management's assessment of the Company's future obligations. Furthermore, management initiated several cost
reductions in the general and administrative costs of the Company for the year ended June 30, 2003. These cost reduction initiatives are expected to further reduce the Company's general and
administrative costs in future periods.

Amortization of Goodwill.The Company recognized $1.4 million of amortization expenses for the year ended
June 30, 2002. On July 1, 2002, the Company adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets". Accordingly, the Company did not recognize any amortization
expense for the year ended June 30, 2003.

Impairment Charges.The Company recognized a $2.1 million impairment charge to reduce the amount of goodwill
attributed to the company's Mexican subsidiary in the year ended June 30, 2002. No similar charges were incurred in the year ended June 30, 2003.

Operating Income (Loss) From Continuing Operations.The Company recorded operating income for the year ended June 30,
2003 of approximately $979,000 compared with an operating loss of $4.7 million for the year ended June 30, 2002. The increase in income from continuing operations is

19

---

attributed
to the fact that there were no impairment charges or goodwill amortization in the current period and the cost reduction initiatives implemented by management.

Gain on Debt Restructuring.The Company recognized a $9.7 million gain from the debt restructuring that was completed
in January 2003 (see Item 7Note 11) and a reduction of approximately $659,000 in accrued expenses associated with its Mexican subsidiary based on management's assessment of
the Company's future obligations.

Other Expense.The Company recorded Other Expense, primarily interest expense, of $664,000 for the year ended June 30,
2003, which represents a decrease in Other Expense of approximately $529,000 or 44% compared to the Other Expense for the year ended June 30, 2002 when other expenses were $1.2 million.
This decrease was primarily the result of the $1.4 million reduction in interest expense as a result of the Company's debt restructuring (see Item 7Note 11). This was
partially offset by the settlement of the Performance Concepts/Radcliffe case in the fourth quarter of fiscal year 2002, which generated a $1.0 million other expense reduction. No similar gains
were incurred in the year ended June 30, 2003.

Gain (Loss) From Discontinued Operations.The Company recorded a loss from discontinued operations for the year ended
June 30, 2003 of $648,000 compared with a loss from discontinued operations of $1.8 million for the year ended June 30, 2002 relating to the disposal of its manufacturing
operations (see Item 7- Note 4).

Net Income (Loss) Applicable to Common Shareholders and Earnings Per Share.The Company recorded Net Income Applicable to
Common Shareholders of $10.9 million, or $0.72 per share, for the year ended June 30, 2003 compared to the Net Loss Applicable to Common Shareholders of $7.7 million, or ($0.69)
per share, for the year ended June 30, 2002.

Liquidity
and Capital Resources

Sources
and Uses of Cash

Cash
at June 30, 2003 was $1.6 million. This represents an increase of $534,000 from June 30, 2002. During the period, cash provided by operations was $116,000. The
Company generated operating profit in fiscal year 2003 and expects to do so in fiscal year 2004.

Cash
provided by investing activities for the twelve months ended June 30, 2003 was $1.1 million resulting primarily from the sale of assets in the Company's manufacturing
operations.

Cash
used in financing activities for the twelve months ended June 30, 2003 was $707,000. Cash used in financing activities during the period consisted of repayments of the
subordinated debt and other notes payable.

Debt
Transactions

On
October 30, 2002, the Company reached an agreement with Precision Funding, L.L.C. and a former board member to convert approximately $17.6 million of outstanding debt
and accrued interest due to them to equity. In exchange for the extinguishment of the approximately $17.6 million in outstanding debt and accrued interest due, the Company issued Precision
Funding, L.L.C. and the former board member the following:



20

---



Issuance
of the warrants was subject to shareholder approval of a proposal to amend the Articles of Incorporation to increase the Company's authorized shares of common stock. Such
approval was granted at the annual shareholder meeting held on January 15, 2003. As a result, the Company recognized a gain of approximately $6.9 million from the exchange of debt with a
carrying value of $12.6 million for common and preferred stock with a fair value of $5.7 million during the 2nd quarter of fiscal year 2003. The remaining
$2.8 million gain from the exchange of warrants valued at $2.2 million for the remaining debt with a carrying value of $5.0 million was recognized in January 2003 when
shareholder approval was granted to increase the Company's authorized shares of common stock.

On
July 17, 2003, the Company reached an agreement to restructure $632,528 outstanding on the Board LLC subordinated debt. The terms of the agreement called for the following:



The
Company expects to recognize a gain of approximately $160,000 from the cancellation of this debenture in the first quarter of fiscal year 2004.

Seasonality
and Quarterly Fluctuations

Seasonal
changes may impact various sectors of the Company's business differently and, accordingly, the Company's operations may be affected by seasonal trends in certain periods. In
particular, severe weather in winter months can adversely affect the Company because such weather makes it difficult for consumers in affected parts of the country to travel to Precision Auto Care and
Precision Lube Express centers.

21

---



Item 7.Financial Statements

22

---

Report of Independent Certified Public Accountants

To
the Board of Directors and
Stockholders of Precision Auto Care, Inc.

We
have audited the accompanying consolidated balance sheets of Precision Auto Care, Inc. (the Company) and subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash flows for the years then ended. 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 in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Precision Auto Care, Inc. and
subsidiaries as of June 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.

As
discussed in Note 8 to the consolidated financial statements, the Company has adopted Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible Assets"
(SFAS 142), on July 1, 2002.



Vienna,
Virginia
September 9, 2003

23

---



PRECISION AUTO CARE, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                                                                    | June 30,
2003                                        |           | June 30,
2002 |           
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------- | ------------- | ----------
|ASSETS                                         |                                                                                                                                    |                                                      |           |               |           
|Current assets:                                |                                                                                                                                    |                                                      |           |               |           
|                                               | Cash and cash equivalents                                                                                                          |                                                      | $         | 1,564,110     |           
|                                               | Restricted cash in escrow                                                                                                          |                                                      |           |              |           
|                                               | Accounts receivable, net of allowance of $184,607 and $2,371,314, Respectively                                                     |                                                      |           | 756,565       |           
|                                               | Inventory, net of allowance of $0 and $410,000, respectively                                                                       |                                                      |           |              |           
|                                               | Other assets                                                                                                                       |                                                      |           | 401,079       |           
|                                               | Assets of discontinued operations                                                                                                  |                                                      |           | 16,759        |           
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total current assets                                 |           |               | 2,738,513 
|Property, plant and equipment, at cost         |                                                                                                                                    |                                                      | 4,092,222 |               |           
|                                               | Less: Accumulated depreciation                                                                                                     |                                                      |           | (3,664,823    | )         
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    |                                                      | 427,399   |               |           
|Goodwill                                       |                                                                                                                                    |                                                      | 8,711,744 |               |           
|Deposits and other                             |                                                                                                                                    |                                                      | 130,648   |               |           
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total assets                                         |           | $             | 12,008,304
|                                               |                                                                                                                                    |                                                      |           |               |           
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |                                                                                                                                    |                                                      |           |               |           
|Current liabilities:                           |                                                                                                                                    |                                                      |           |               |           
|                                               | Accounts payable and accrued liabilities                                                                                           |                                                      | $         | 2,543,945     |           
|                                               | Board LLC note                                                                                                                     |                                                      |           | 116,163       |           
|                                               | Other notes payablecurrent                                                                                                        |                                                      |           | 174,267       |           
|                                               | Liabilities from discontinued operations                                                                                           |                                                      |           | 73,443        |           
|                                               | Deferred revenue                                                                                                                   |                                                      |           | 307,500       |           
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total current liabilities                            |           |               | 3,215,318 
|Credit facility with related party             |                                                                                                                                    |                                                      |          |               |           
|Subordinated debt                              |                                                                                                                                    |                                                      |          |               |           
|Board LLC note                                 |                                                                                                                                    |                                                      | 516,365   |               |           
|Other notes payablenon-current                |                                                                                                                                    |                                                      | 222,357   |               |           
|Accrued interest on related party debt         |                                                                                                                                    |                                                      |          |               |           
|Deferred revenue and other                     |                                                                                                                                    |                                                      | 210,000   |               |           
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total liabilities                                    |           |               | 4,164,040 
|Commitments and contingencies                  |                                                                                                                                    |                                                      |          |               |           
|Redeemable preferred stock                     |                                                                                                                                    |                                                      | 5,180,000 |               |           
|Stockholders' equity (deficit):                |                                                                                                                                    |                                                      |           |               |           
|                                               | Common stock, $.01 par value; 39,000,000 and 19,000,000 shares authorized; 16,558,833 and 13,318,030 shares issued and outstanding |                                                      |           | 165,588       |           
|                                               | Additional paid-in capital                                                                                                         |                                                      |           | 52,380,481    |           
|                                               | Accumulated deficit                                                                                                                |                                                      |           | (49,881,805   | )         
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total stockholders' equity (deficit)                 |           |               | 2,664,264 
|                                               |                                                                                                                                    |                                                      |           |               |           
|                                               |                                                                                                                                    | Total liabilities and stockholders' equity (deficit) |           | $             | 12,008,304
|                                               |                                                                                                                                    |                                                      |           |               |           

See
accompanying notes.

24

---

PRECISION AUTO CARE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                |                                   | For The Years Ended
June 30, |           
|------------------------------------------------------------------------------- | --------------------------------- | ---------------------------- | ----------
|
|Revenues:                                                                       |                                   |                              |           
|                                                                                | Franchise royalties               |                              | $         
|                                                                                | Franchise development             |                              |           
|                                                                                | Company owned centers             |                              |           
|                                                                                | Other                             |                              |           
|                                                                                |                                   |                              |           
|                                                                                |                                   | Total revenues               |           
|Direct cost:                                                                    |                                   |                              |           
|                                                                                | Franchise support                 |                              |           
|                                                                                |                                   |                              |           
|Contribution (exclusive of amortization shown separately below)                 |                                   |                              | 4,866,392 
|General and administrative expense                                              |                                   |                              | 3,466,837 
|Depreciation expense                                                            |                                   |                              | 409,840   
|Amortization of goodwill                                                        |                                   |                              |          
|Other operating expense                                                         |                                   |                              | 11,300    
|Impairment charges                                                              |                                   |                              |          
|                                                                                |                                   |                              |           
|Operating income (loss)                                                         |                                   |                              | 978,415   
|                                                                                | Gain on debt restructuring        |                              |           
|                                                                                | Interest expense                  |                              |           
|                                                                                | Other income                      |                              |           
|                                                                                |                                   |                              |           
|                                                                                |                                   | Total other income (expense) |           
|                                                                                |                                   |                              |           
|Income (loss) before income tax expense                                         |                                   |                              | 10,728,549
|Provision for income taxes                                                      |                                   |                              | 7,500     
|                                                                                |                                   |                              |           
|Income (loss) from continuing operations                                        |                                   |                              | 10,721,049
|Discontinued operations:                                                        |                                   |                              |           
|                                                                                | Loss from discontinued operations |                              |           
|                                                                                | Gain on disposal                  |                              |           
|                                                                                |                                   |                              |           
|Net income (loss)                                                               |                                   |                              | 10,975,012
|Preferred stock dividends                                                       |                                   |                              | 43,167    
|                                                                                |                                   |                              |           
|Net income (loss) applicable to common shareholders                             |                                   | $                            | 10,931,845
|                                                                                |                                   |                              |           
|Income (loss) from continued operations per common shareBasic and Diluted      |                                   | $                            | 0.71      
|Gain (loss) from discontinued operations per common shareBasic and Diluted     |                                   |                              | 0.02      
|Net income (loss) applicable to common stock per common shareBasic and Diluted |                                   | $                            | 0.72      
|Weighted average common shares outstandingBasic                                |                                   |                              | 15,152,379
|Weighted average common shares outstandingDiluted                              |                                   |                              | 15,188,186

See
accompanying notes.

25

---



PRECISION AUTO CARE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

|                                    |  | Common Shares |   | Common Stock |         | Additional
Paid-in
Capital |   | Unearned
Restricted
Stock |   | Accumulated
Deficit |         | Total |  
|----------------------------------- |  | ------------- | - | ------------ | ------- | -------------------------- | - | ------------------------- | - | ------------------- | ------- | ----- | -
|Balance at June 30, 2001            |  | 9,149,358     |   | $            | 91,492  |                            | $ | 48,189,136                |   | $                   | (48,125 | )     | $
|Issuance of common stock            |  | 2,593,672     |   |              | 25,938  |                            |   | 746,977                   |   |                     |        |       |  
|Issuance of common stock bonus      |  | 575,000       |   |              | 5,750   |                            |   | 126,500                   |   |                     |        |       |  
|Exercise of warrants                |  | 1,000,000     |   |              | 10,000  |                            |   | 265,000                   |   |                     |        |       |  
|Restricted stock earned             |  |              |   |              |        |                            |   |                          |   |                     | 48,125  |       |  
|Net loss                            |  |              |   |              |        |                            |   |                          |   |                     |        |       |  
|                                    |  |               |   |              |         |                            |   |                           |   |                     |         |       |  
|Balance at June 30, 2002            |  | 13,318,030    |   | $            | 133,180 |                            | $ | 49,327,613                |   | $                   |        |       | $
|                                    |  |               |   |              |         |                            |   |                           |   |                     |         |       |  
|Issuance of common stock            |  | 2,500,000     |   |              | 25,000  |                            |   | 475,000                   |   |                     |        |       |  
|Common stock issued as compensation |  | 741,303       |   |              | 7,413   |                            |   | 248,087                   |   |                     |        |       |  
|Debt to equity conversion           |  |              |   |              |        |                            |   | 2,294,408                 |   |                     |        |       |  
|Stock option compensation           |  |              |   |              |        |                            |   | 39,868                    |   |                     |        |       |  
|Retirement of treasury stock        |  | (500          | ) |              | (5      | )                          |   | (4,495                    | ) |                     |        |       |  
|Net income                          |  |              |   |              |        |                            |   |                          |   |                     |        |       |  
|                                    |  |               |   |              |         |                            |   |                           |   |                     |         |       |  
|Balance at June 30, 2003            |  | 16,558,833    |   | $            | 165,588 |                            | $ | 52,380,481                |   | $                   |        |       | $
|                                    |  |               |   |              |         |                            |   |                           |   |                     |         |       |  

See
accompanying notes.

26

---

PRECISION AUTO CARE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                                                   | For The Years Ended
June 30,                                 |           
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------
|
|Operating activities:                                                                              |                                                                                   |                                                              |           
|Net income (loss) applicable to common shareholders                                                |                                                                                   | $                                                            | 10,931,845
|Net (gain) loss from discontinued operations                                                       |                                                                                   |                                                              | (253,963  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                                   |                                                              |           
|                                                                                                   | Impairment charges                                                                |                                                              |           
|                                                                                                   | Depreciation and amortization                                                     |                                                              |           
|                                                                                                   | Amortization of debt discount                                                     |                                                              |           
|                                                                                                   | Gain on debt restructuring                                                        |                                                              |           
|                                                                                                   | Gain on sale of assets                                                            |                                                              |           
|                                                                                                   | Stock issued for compensation                                                     |                                                              |           
|                                                                                                   | Stock option compensation                                                         |                                                              |           
|                                                                                                   | Cancellation of treasury stock                                                    |                                                              |           
|                                                                                                   | Services received in exchange for stock                                           |                                                              |           
|                                                                                                   | Changes in assets and liabilities from continuing operations:                     |                                                              |           
|                                                                                                   |                                                                                   | Accounts receivable                                          |           
|                                                                                                   |                                                                                   | Inventory                                                    |           
|                                                                                                   |                                                                                   | Prepaid expenses, deposits and other                         |           
|                                                                                                   |                                                                                   | Assets held for sale                                         |           
|                                                                                                   |                                                                                   | Accounts payable and accrued liabilities                     |           
|                                                                                                   |                                                                                   | Deferred revenue and other                                   |           
|                                                                                                   |                                                                                   | Changes in assets and liabilities of discontinued operations |           
|                                                                                                   |                                                                                   |                                                              |           
|Net cash provided by (used in) operating activities                                                |                                                                                   |                                                              | 115,577   
|Investing activities:                                                                              |                                                                                   |                                                              |           
|                                                                                                   | Purchases of property and equipment                                               |                                                              |           
|                                                                                                   | Proceeds from sale of Mexican subsidiary and related technical services Agreement |                                                              |           
|                                                                                                   | Proceeds from sale of business                                                    |                                                              |           
|                                                                                                   | Proceeds from sale of assets of manufacturing operations                          |                                                              |           
|                                                                                                   |                                                                                   |                                                              |           
|Net cash provided by investing activities                                                          |                                                                                   |                                                              | 1,126,259 
|Financing activities:                                                                              |                                                                                   |                                                              |           
|                                                                                                   | Proceeds from issuance of common stock                                            |                                                              |           
|                                                                                                   | Proceeds from exercise of warrants                                                |                                                              |           
|                                                                                                   | Retirement of treasury stock                                                      |                                                              |           
|                                                                                                   | Payment of preferred stock dividends                                              |                                                              |           
|                                                                                                   | Repayment of subordinated debt and other notes payable                            |                                                              |           
|                                                                                                   |                                                                                   |                                                              |           
|Net cash (used in) provided by financing activities                                                |                                                                                   |                                                              | (707,369  
|                                                                                                   |                                                                                   |                                                              |           
|Net change in cash and cash equivalents                                                            |                                                                                   |                                                              | 534,467   
|Cash and cash equivalents at beginning of year                                                     |                                                                                   |                                                              | 1,029,643 
|                                                                                                   |                                                                                   |                                                              |           
|Cash and cash equivalents at end of period                                                         |                                                                                   | $                                                            | 1,564,110 
|                                                                                                   |                                                                                   |                                                              |           
|Supplemental schedule of non cash investing and finance activities:                                |                                                                                   |                                                              |           
|Carrying value of debt cancelled in exchange for issuance of common and preferred stock            |                                                                                   | $                                                            | 17,720,508
|Fair value of common, preferred stock, and warrants issued in exchange for cancellation of debt    |                                                                                   | $                                                            | 7,974,408 
|Property and equipment acquired under capital lease                                                |                                                                                   | $                                                            | 79,459    

See
accompanying notes.

27

---



PRECISION AUTO CARE, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1Business Description and Financial Statement Presentation

Precision Auto Care, Inc. (the "Company") is a franchisor of automotive maintenance service centers which provide specialized automotive care services, and
fast oil change and lube services. These franchisee owned centers operate primarily under the Precision Tune Auto Care and Precision Lube Express brand names. The Company disposed of its manufacturing
business in March and April 2003 (See Note 4).

Note 2Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

Currency Translation

The Company sold the assets of its subsidiaries in Mexico in January 2002. Prior to the sale, the U.S. dollar was used as the functional currency for all
the Company's consolidated operations, including its Mexican subsidiary whose economic environment is highly inflationary, as such, the Mexican
subsidiary's financial statements were remeasured as if the functional currency were U.S. dollars. All gains and losses from currency translation are included in operations.

Revenue Recognition

The Company's royalty revenue is recognized as earned in accordance with the specific terms of each agreement and to the extent no issues involving collection
exist.

Revenue
from the sale of a franchise is recognized upon the opening of the franchised center.

The
Company enters into domestic Area Development agreements and international Master License agreements (Agreements) which grant the area developer and master licensor, respectively,
the right to sell, on the Company's behalf, Precision Tune Auto Care franchises and Precision Lube Express franchises within a specific geographic region. Revenue from the sale of Area Development
agreements is recognized as all material services or conditions related to the sales are satisfied. Revenue from the sale of master licenses is recognized upon signing the Agreement since the Company
is not required to support the international franchises as there is no contractual agreement between the Company and the international franchisees.

Revenue
from the sale of car wash equipment, modular automobile lubrication units, and parts is recognized when such units have been shipped to customers and the Company has performed on
all obligations related to the sale, such as installation and assistance with site development.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of highly liquid debt instruments with original maturities of three months or less.

Inventory

Inventory is stated at the lower of cost or market. The cost of modular automotive lubrication units, car wash equipment, and car wash supplies is determined by
the first-in, first-out (FIFO) method.

28

---

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated on a straight-line basis for book purposes and accelerated methods for tax purposes
over the estimated useful lives of the related assets. The estimated useful lives are as follows:

YearsBuilding and leasehold improvements

11 - 30Furniture and fixtures

5 -  7Equipment

3 - 10Other items

3 -  7


Income Taxes

The Company accounts for income taxes under the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities. A valuation allowance is established, if necessary, to reduce deferred income tax assets to the amount expected to be
realized.

Impairment of Long-Lived Assets

The Company evaluates the carrying amount of long-lived assets to be held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying amount of a long lived asset is considered impaired when the estimated undiscounted cash flow from each asset is less than its carrying amount. In
that event, the Company would record a loss equal to the amount by which the carrying amount exceeds the fair market value of the long-lived asset. Assets to be disposed of are measured at
the lower of carrying amount or fair value less cost to sell.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, trade accounts receivable and
notes receivable. The Company's cash is held at FDIC insured financial institutions. The trade receivable balances are dispersed among a wide customer and franchisee base. The Company routinely
assesses the financial strength of its customers. The Company maintains reserves for credit losses, and such losses have been within management's expectations.

Advertising Costs

The Company expenses all advertising costs as incurred. The Company incurred $136,000 and $246,000 in advertising costs for the years ended June 30, 2003
and 2002, respectively.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at

29

---

the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Goodwill and Intangible Assets

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets", which supercedes Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets". This statement addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
Goodwill will cease to be amortized upon the implementation of the statement and companies must test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective
July 1, 2002 and ceased amortizing goodwill of $8.7 million.

This
statement requires that goodwill be tested for impairment annually unless the underlying reporting unit has not changed significantly, the most recent valuation substantially
exceeded the carrying value of goodwill, and events or circumstances have not occurred such that the likelihood of impairment is remote. In June 2002, the Company had a business enterprise
valuation conducted of its automotive care franchising reporting unit. This reporting unit, which is primarily comprised of Precision Tune Auto Care®, provides automotive services
primarily through franchised operations located in the United States and in certain foreign countries. This income approach based valuation considered the nature of the reporting unit's business, the
economic outlook of its industry, underlying assets, financial condition, and future earning capacity. Based on this valuation, it was determined that the fair value of approximately
$9.5 million was in excess of its carrying value of approximately $7.0 million. Management chose not to update its valuation in 2003 based on its judgment that it met the previously
described exception criteria and the Company's operations and financial position have significantly improved since the previous valuation.

Segment Reporting

The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the quarter ended
September 30, 2001. As a result, the Company evaluated its operations along two business lines: Automotive Care Franchising and Manufacturing and Distribution. In March and April 2003,
the Manufacturing and Distribution segment was disposed of as a result of management's decision to discontinue this business line (see Note 4).

Stock Options

The Company generally applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock options and presents pro forma net income and earnings per share data as if the accounting prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" had been applied. The Company also applies the provisions of FIN 44, "Accounting for Certain Transactions Involving Stock Compensation", as required when modifications
and other provisions cause the application of variable accounting which calls for the periodic measurement of compensation expense based on the difference in the exercise price and the underlying
value of the related stock.

Historically,
no stock-based compensation cost was reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the
date of grant. However, as described further in Note 14, in fiscal year 2003, the Company repurchased certain options

30

---

from
employees and issued new options exercisable at an exercise price of $0.44, resulting in the newly issued options being treated as a repricing under FIN 44 which triggers variable accounting. As
a result, the Company recorded compensation expense of approximately $40,000 associated with these options. Had compensation cost for all options been determined based on the fair value at the grant
dates during the years ending June 30, 2003 and 2002 under the plan consistent with the method of SFAS No. 123, the pro forma net income (loss) and income (loss) per share would have
been as follows:

Year ended June 30,2003

2002Net income (loss) applicable to common shareholders

$
10,931,845

$
(7,699,376
)Add: Total stock-based compensation expense reported in net income (loss)


39,868


Deduct: Total stock-based compensation expense determined under fair value based method for all awards*


128,000


311,000Pro forma net income (loss)

$
10,843,713

$
(8,010,376
)Earnings per share:Basic and dilutedas reported

$
0.72

$
(0.69
)Basic and dilutedpro forma

$
0.72

$
(0.72
)Weighted average shares:Weighted average common shares outstandingBasic


15,152,379


11,116,168Weighted average common shares outstandingDiluted


15,188,186


11,116,168


---

Net Income (Loss) Per Share

The Company reports earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" which
specifies the methods of computation, presentation, and disclosure. SFAS No. 128 requires the presentation of basic EPS and diluted EPS. Basic EPS is calculated by dividing net income (loss)
available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) available to common shareholders by the
weighted average number of shares outstanding during the period plus the dilutive effect of common stock equivalents. The weighted average number of shares outstanding related to stock options at
June 30, 2003 and 2002 was 1,874,200 and 1,717,325, respectively. Only stock options with exercise prices lower than the average market price of the common shares were included in the diluted
EPS calculation for fiscal year 2003. No common stock equivalents were included in fiscal year 2002 since the Company reported a net loss.

31

---

The
following table sets forth the computation of basic and diluted net loss per share.

For The Years Ended June 30,2003

2002Numerator:Income (loss) from continuing operations

$
10,721,049

$
(5,911,030
)Gain (loss) from discontinued operations


253,963


(1,788,346
)Preferred stock dividends


(43,167
)

Net income (loss) applicable to common Shareholders

$
10,931,845

$
(7,699,376
)Denominator:Denominator for basic EPS weighted-average-shares


15,152,379


11,116,168Common stock equivalentstock options


35,807


Denominator for diluted EPS weighted-average-shares


15,188,186


11,116,168Basic and diluted income (loss) from continued operations per share

$
0.71

$
(0.53
)Basic and diluted loss from discontinued operations per share


0.02


(0.16
)Basic and diluted income (loss) applicable to common shareholders per share

$
0.72

$
(0.69
)


Reclassifications

Certain amounts on the prior period financial statements have been reclassed to be in conformity with the current period financial statements. Due to the disposal
of its manufacturing operations in April 2003, the Company has one remaining business segment, Automotive Care Franchising. Accordingly, the distribution revenue and direct costs associated
with the Company's franchising
activities have been reclassified to its Automotive Care Franchising segment for fiscal years 2003 and 2002.

Note 3New Accounting Pronouncements

In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS 145 rescinds certain standards and modifies certain standards related to the extinguishment of debt and sale-leaseback transactions. The provisions of
SFAS 145 are generally effective after May 15, 2002. As a result of the adoption of this standard, the $9.7 million gain from the Company's debt to equity conversion (see
Note 11) was recorded in other income in the accompanying financial statements as opposed to being reflected as an extraordinary item.

In
January 2003, the FASB issued Interpretation Number 46, Consolidation of Variable Interest Entities ("FIN 46"). This interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in
consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of "variable interests" and requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved.

32

---

This
interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first
year restated. Adoption of this standard is not expected to have a material effect on the Company's financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for derivative instruments and hedging activities entered into or modified after June 30, 2003, except for certain forward purchase and sale securities. For these forward purchase and sale
securities, SFAS No. 149 is effective for both new and existing securities after June 30, 2003. Adoption is not expected to have a material impact on the Company's financial statements.

In
May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150
establishes standards for issuer classification and measurement of certain financial instruments with characteristics of both liabilities and equity. Instruments that fall within the scope of SFAS
No. 150 must be classified as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. For financial instruments issued on or
before May 31, 2003, SFAS No. 150 is effective for the Company in the first quarter of fiscal year 2004. Upon adoption, the Company's redeemable preferred stock would be reclassified to
stockholders' equity.

Note 4Discontinued Operations

The Company disposed of its manufacturing and distribution operating segment as a result of the sale of substantially all of the assets of Worldwide Drying
Systems (Worldwide) and Hydro Spray Car Wash Equipment Co. (Hydro Spray) in March 2003 and April 2003, respectively. The sale of Worldwide for $300,000 in cash included inventory and
manufacturing equipment with a carrying value of $93,000. The resulting gain of $144,000, which included $63,000 in selling expenses associated with this sale, was recognized in March 2003.
Substantially all of the assets of Hydro Spray were sold in April 2003 for $900,000 to a group led by Ernest Malas, a former director and consultant of the Company's manufacturing division. The
Company received $450,000 in cash and a note for $450,000, payable to the Company in 75 monthly payments of $6,000. On June 17, 2003, the purchaser of Hydro Spray purchased the note from
the Company for $204,000. The Company recorded a gain of $758,000 from the sale of Hydro Spray in the fourth quarter of fiscal year 2003.

33

---

As
a result of the sale of Hydro Spray and Worldwide, the Company retained the following assets and liabilities. These assets and liabilities are included in the assets and liabilities
from discontinued operations at June 30, 2003:

June 30,
2003Assets of discontinued operations:Accounts receivable, net

$
16,759Total assets of discontinued operations

$
16,759Liabilities of discontinued operations:Accounts payable and accrued liabilities

$
45,230Note payable


24,998Other


3,215Total liabilities of discontinued operations

$
73,443


The
following amounts related to the Company's manufacturing operations have been segregated from continuing operations and reflected as discontinued operations for the years ended
June 30, 2003 and 2002:

For The Years Ended
June 30,2003

2002Revenues

$
3,894,506

$
7,088,458Expenses:Direct costs.


3,208,197


6,609,586General and administrative expense


1,243,179


2,171,262Depreciation expense


67,448


119,499Other expense (income)


23,227


(23,543
)Loss from discontinued operations


(647,545
)

(1,788,346
)Gain on sale of discontinued operations


901,508


Net gain (loss) from discontinued operations

$
253,963

$
(1,788,346
)


Note 5Cash Held in Escrow

In October 2002, the Company received $175,000 previously held in escrow from the sale of its Mexican subsidiary in January 2002 upon satisfaction
of all requirements under the escrow agreement.

34

---

Note 6Inventory

The components of inventory are as follows:

June 30,
2003

June 30,
2002Raw materials

$


$
822,613Work-in-process





183,499Finished goods





188,000Reserve for obsolete and unsaleable inventory





(410,000
)$


$
784,112


Note 7Property, Plant and Equipment

The components of property, plant and equipment are as follows:

June 30,2003

2002Building and leasehold improvements

$
46,809

$
58,621Furniture and fixtures


1,047,558


1,155,003Equipment


2,463,324


2,841,739Equipment under capital lease


79,459


Other items


455,072


616,8144,092,222


4,672,177Accumulated depreciation


(3,664,823
)

(3,676,506
)Property, plant and equipment, net

$
427,399

$
995,671


Note 8Goodwill and Other Intangibles

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets", which eliminated the systematic amortization of goodwill. The Company
adopted SFAS No. 142 effective July 1, 2002. Had
SFAS No. 142 been effective July 1, 2001, net income and earnings per share would have been reported as follows:

For The Years Ended June 30,2003

2002Reported net income (loss) applicable to common shareholders

$
10,931,845

$
(7,699,376
)Add back: goodwill amortization





1,369,513Adjusted net income (loss) applicable to common shareholders

$
10,931,845

$
(6,329,863
)Basic and diluted earnings per share:Reported net income applicable to common
shareholders

$
0.72

$
(0.69
)Goodwill amortization





0.12Adjusted net income (loss) applicable to common shareholders

$
0.72

$
(0.57
)


35

---

Note 9Income Taxes

Income tax expense consists of the following items:

Years Ended June 30,2003

2002Current tax expense (benefit)federal, foreign and state

$
7,500

$
65,000Deferred tax expense (benefit)federal, foreign and state





Total income tax expense

$
7,500

$
65,000


The
effective tax rate differed from the statutory rate as follows:

Years Ended June 30,2003

2002Statutory federal rate

34
%
(34
)%Amortization of goodwill and other intangibles



6State taxes

5

(5
)Foreign taxes



1Valuation allowance

(39
)
33Effective tax rate

0
%
1
%


Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are as follows:

June 30,2003

2002Deferred tax assets:Net operating loss

$
6,971,000

$
10,195,000Other


83,000


896,0007,054,000


11,091,000Valuation allowance for deferred tax assets


(7,054,000
)

(11,091,000
)Net deferred taxes

$


$



36

---



Note 10Debt

During fiscal year 2001, the Company was successful in obtaining a new source of financing with Precision Funding LLC, an entity controlled by two former board
members of the Company. On October 30, 2002, the Company reached an agreement with Precision Funding, L.L.C. and a former board member to convert approximately $17.6 million of
outstanding debt and accrued interest due to them to equity. In exchange for the extinguishment of the approximately $17.6 million in outstanding debt and accrued interest due, the Company
issued Precision Funding, L.L.C. and the former board member (see Note 11).

In
addition to the credit facility with Precision Funding LLC, the Company had two outstanding subordinated debenture agreements. Under the terms of each subordinated debenture, payments
of principal and interest on certain of the subordinated debt may have only been made by the Company if the Company had made all required payments to Precision Funding or was otherwise not in default
under that credit facility.

The
first subordinated debenture in the amount of $2.0 million was executed in October 1998 with an LLC composed of certain members of the Company's board of directors
(Board LLC). On July 17, 2003, the Company reached an agreement with the Board LLC to cancel this debenture (see Note 11).

The
second subordinated debenture in the amount of $5.0 million was executed in January 1999 directly with a former member of the Company's board of directors.
$1.4 million of the original principal amount had been repaid. On October 30, 2002, this debenture was cancelled as a result of the agreement reached on October 30, 2002 (see
Note 11).

During
the years ended June 30, 2003 and 2002, the Company incurred interest expense of approximately $754,000 and $2,138,000, respectively.

Long-term
debt consists of the following:

June 30,2003

2002Credit facility

$


$
11,250,000Various notes and obligations payable in monthly installments


345,056


437,166Lease obligations


51,568


Board LLC note


632,528


805,406Director note





3,586,9601,029,152


16,079,532Less: current maturities


(290,430
)

(893,707
)unamortized debt discount





(305,468
)Long-term portion

$
738,722

$
14,880,357


37

---

The
future debt obligations with maturities in excess of one year as of June 30, 2003 are as follows:

Future
Debt Maturities2004


290,4302005


266,3202006


222,2552007


168,0942008


82,053$
1,029,152


Note 11Debt Restructuring

Debt Restructuring

On October 30, 2002, the Company reached an agreement with Precision Funding, L.L.C. and a former board member to convert approximately
$17.6 million of outstanding debt and accrued interest due to them to equity. In exchange for the extinguishment of the approximately $17.6 million in outstanding debt and accrued
interest due, the Company issued Precision Funding, L.L.C. and the former board member the following:



Issuance
of the warrants was subject to shareholder approval of a proposal to amend the Articles of Incorporation to increase the Company's authorized shares of common stock. Such
approval was granted at the annual shareholder meeting held on January 15, 2003. As a result, the Company recognized a gain of approximately $6.9 million from the exchange of debt with a
carrying value of $12.6 million for common and preferred stock with a fair value of $5.7 million during the 2nd quarter of fiscal year 2003. The remaining
$2.8 million gain from the exchange of warrants valued at $2.2 million for the remaining debt with a carrying value of $5.0 million was recognized in January 2003 when
shareholder approval was granted to increase the Company's authorized shares of common stock.

38

---

On
July 17, 2003, the Company reached an agreement to restructure the Board LLC subordinated debt. The terms of the agreement called for the following:



The
Company expects to recognize a gain of approximately $160,000 from the cancellation of this debenture in the first quarter of fiscal year 2004.

Note 12Lease Commitments

At June 30, 2003, the Company has lease commitments for office space, a training center, and a number of service center locations as well as office
equipment under operating and capital leases. These leases expire between 2004 and 2009, with renewal options in certain of the leases. Most of the service center location leases are subleased to
franchisees. Rent expense for office space and warehouse facilities of approximately $385,000 and $377,000 is included in operating expenses for the year ended June 30, 2003 and 2002
respectively. Rent expense for service center locations of approximately $70,000 and $96,000 is recorded net of sublease income of $40,000 and $82,000 for the years ended June 30, 2003 and
2002, respectively.

The
future minimum lease payments and related sublease payments for operating leases with terms in excess of one year as of June 30, 2003, are as follows:

Future Minimum
Lease Payments

Sublease
Income

Net2004

$
653,000

$
352,000

$
301,0002005


574,000


223,000


351,0002006


576,000


232,000


344,0002007


564,000


239,000


325,0002008


570,000


235,000


335,000Thereafter


245,000


47,000


198,000$
3,182,000

$
1,328,000

$
1,854,000


39

---

The
future minimum lease payments for capital leases with terms in excess of one year as of June 30, 2003, are as follows:

Future Minimum
Lease Payments2004

$
32,8882005


13,8792006


7,5432007


7,5432008


1,258Total lease payments

$
63,111Less amounts representing interest


11,543Present value of net lease payments

$
51,568


Note 13Related Party Transactions

The Company manages the operation of P. T. A. C. Marketing Fund, Inc. ("PMG"), the national advertising fund for Precision Tune Auto Care Centers, pursuant
to a Management Agreement approved by the Board of Directors of PMG, which is comprised of franchisee and Company personnel. The Company charged PMG $669,000 and $545,000 for administrative and other
expenses incurred on behalf of PMG, for the years ended June 30, 2003 and 2002, respectively. Based on the timing of receipts and disbursements, it is common for amounts to be due to and from
the Company and PMG. At June 30, 2003 and 2002, the net amounts due from PMG, Inc. were $0 and $138,000 respectively. These amounts are included in accounts receivable.

On
September 29, 2000, the Company issued senior debentures to Precision Funding, LLC, an entity created, owned, and controlled by Arthur C. Kellar and Desarollo Integrado, S.A.
de C.V. ("Desarollo Integrado"), an entity controlled by Mr. Zambrano. Mr. Kellar and Mr. Zambrano are former members of the Board of Directors of the Company. On
October 26, 2001, Precision Funding, L.L.C., assigned its interest in the Company's trademarks and certain other assets relating to the franchising operations to Precision Franchising, LLC, a
wholly owned subsidiary of the Company. In connection with this assignment, the Company pledged all of its membership interest in Precision Franchising, LLC to Precision Funding LLC as collateral for
the loan dated September 29, 2000. On October 30, 2002, the pledge was cancelled as a result of the agreement reached on October 30, 2002 (see Note 11).

Another
subordinated debenture in the amount of $5.0 million was executed in January 1999 directly with Mr. Kellar, a former member of the Company's board of
directors. $1.4 million of the original principal amount had been repaid. Originally due May 25, 1999, the term of this subordinated debenture had been extended to September 30,
2003. The holder had also waived all debt covenants through September 30, 2003. This debenture and related accrued interest was converted to equity as a result of the agreement reached on
October 30, 2002 (see Note 11).

Another
subordinated debenture in the amount of $2.0 million was executed in October 1998 with an LLC composed of certain current and former members of the Company's board
of directors (Board

40

---

LLC).
On July 17, 2003, the Company reached an agreement with the Board LLC to restructure this debt obligation (see Note 11).

Bassam
N. Ibrahim, a director of the Company, is a partner in Burns, Doane, Swecker & Mathis LLP, an Alexandria, Virginia law firm that performs legal services for the Company
related to intellectual property protection. Fees paid to the firm by the Company in the fiscal year ended June 30, 2003 did not exceed five percent of the firm's gross revenues.

The
Company disposed of its manufacturing and distribution operating segment as a result of the sale of substantially all of the assets of Worldwide Drying Systems (Worldwide) and Hydro
Spray Car Wash Equipment Co. (Hydro Spray) in March 2003 and April 2003, respectively. Substantially all of the assets of Worldwide were sold in March 2003 for $300,000 to a group
led by a relative of an officer of the Company. The sale of Worldwide for $300,000 in cash included inventory and manufacturing equipment with a carrying value of $93,000. The resulting gain of
$144,000, which included $63,000 in selling expenses associated with this sale, was recognized in March 2003. Substantially all of the assets of Hydro Spray were sold in April 2003 for
$900,000 to a group led by Ernest Malas, a former director and consultant of the Company's manufacturing division. The Company received $450,000 in cash and a note for $450,000, payable to the Company
in 75 monthly payments of $6,000. On June 17, 2003, the purchaser of Hydro Spray bought the note back from the Company for $204,000. The Company recorded a gain of $758,000 from the sale
of Hydro Spray in the fourth quarter of fiscal year 2003.

Note 14Stockholders' Equity

In April 2002, approximately $2.6 million shares of common stock were issued by the Company via a public rights offering for $765,000.

During
the year ended June 30, 2003, approximately 741,000 shares of common stock were issued to officers of the Company as bonus compensation totaling $175,500. In addition,
250,000 shares of common stock are to be issued to an officer of the Company in September 2003 contingent on the officer being employed by the Company as of August 31, 2003. Compensation
expense was recorded for the earned portion of these shares as of June 30, 2003.

In
October 2002, the Company, Precision Funding, L.L.C. and a former board member reached an agreement to convert approximately $17.6 million of outstanding debt and
accrued interest owed by the Company to equity (see Note 11). In exchange for the extinguishment of the outstanding debt and accrued interest due, the Company issued Precision Funding, L.L.C.
and the former board member the following:



41

---





In 1999, the Company's Board of Directors and the Company's stockholders approved the 1999 Employee Stock Option Plan (the "Option Plan") and reserved 600,000
shares for issuance under the Plan. On March 21, 2001 the Company's stockholders approved an amendment to increase the authorized shares under this plan to 1,600,000. On January 15, 2003
the Company's stockholders approved an amendment to increase the authorized shares under this plan to 2,600,000. Options available for future grant under this plan were 625,000 at June 30,
2003.

Options
reserved for issuance under predecessor plans consist of 400,000 related to the 1997 Employee Stock Option Plan, 175,000 related to the 1996 Employee Stock Option Plan, and
75,000 related to the 1998 Director's Stock Option Plan. Options available for future grant at June 30, 2003, under these plans were 2,500, 0, and 75,000 respectively. The Compensation
Committee of the Company's Board of Directors determines the recipients of the award to be granted, exercise price, vesting period, and number of shares underlying the options.

The
Company repurchased 704,000 shares of common stock options (exercise prices of these options range from $0.75 to $1.00 per share) for $0.001 per share in the first quarter of fiscal
year 2003. The Company in turn granted the same participants options for the purchase of 704,000 shares. These options are exercisable at an exercise price of $0.44 per share at the same vesting
schedule as the participant's repurchased options. The Company applies variable accounting as called for by FIN 44 during the remaining life of these options and in doing so, measures compensation
expense periodically when the value of the underlying common stock exceeds the $0.44 exercise price. As a result, the
Company recorded approximately $40,000 in compensation expense in the fourth quarter of fiscal year 2003.

A
summary of the Company's stock option activity for the years ended June 30, are as follows:

Shares
Under Option

Weighted-Average
Exercise PriceJune 30, 2001

1,024,825

1.73Options granted

767,500

0.41Options exercised



Options forfeited

(75,000
)
5.20June 30, 2002

1,717,325

0.99Options granted

465,000

0.44Options exercised



Options forfeited

(308,125
)
0.46June 30, 2003

1,874,200

0.75


At
June 30, 2003 and 2002, options for 938,000 and 621,000 shares, respectively, were exercisable. The weighted average grant date fair value per option for options granted in
2003 and 2002 was $0.25 and $0.34, respectively. The exercise price of options outstanding at June 30, 2003 ranged from $0.22 to $10.00 per share.

42

---

The
following table summarizes the assumptions used by the Company in estimating compensation expense as of the date the options were granted using a binomial model.

2003

2002Risk free interest rate

2.61 to 6.29%

4.72 to 5.43%Volatility factors

230.74%

241.16%Weighted-average expected life of the option (years)

4

9Dividend yield

0.00%

0.00%


Because
option valuation models require the input of highly subjective assumptions, such as expected volatility, and because changes in these subjective input assumptions can materially
affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of the fair value of its stock options.



In 2000, the Company's Board of Directors and the Company's stockholders approved the 2000 Outside Directors' Stock Plan and reserved 50,000 shares for issuance
under the Plan. Shares available for future grant at June 30, 2003, under this plan were 37,000.

Note 15Employees' Savings Plan

The Company maintains a 401(k) plan under which the Company may contribute up to 25% of an employee's first 6% of compensation deferred under the plan. Employees
become eligible after attaining the age of 21 and completing six months of employment with the Company. The employees may elect to contribute up to 15% of their annual compensation subject to
limitations set forth in the Internal Revenue Code. Employees' contributions vest immediately. The employee matching contribution is discretionary and vests 20% after one year and in increments of 20%
each additional year. The employee matching contributions for each of the years ended June 30, 2003 and 2002 were $32,500 and $38,500, respectively.

Note 16Contingencies

The Company is subject to litigation that could have a material adverse impact on its liquidity as follows:

Previously Reported Cases:

Transclean Corporation et al. v. Ashland, Inc. et al., U. S. District Court, District of Minnesota, Civil
No. 02-CV-1138-PAM/JGL, Filed July 8, 2002.

Transclean
Corporation and other related parties filed suit against PACI and several other national chains and local auto repair stores alleging that the defendants' use of
T-Tech brand automatic transmission fluid changing equipment manufactured by and purchased from Bridgewood Services, Inc. infringed upon a patent owned by the plaintiffs. The
complaint seeks an unspecified amount of damages, injunctive relief, attorneys' fees and court costs. PACI denies the allegations and is defending the allegations in the lawsuit.

43

---

In
August 2003, the parties settled this lawsuit with PACI paying Transclean the sum of $43,500 in full settlement of claims asserted by Transclean and the other plaintiffs.

Lumnivision, S.A. de C.V. v. Praxis Afinaciones, S.A. de C.V., Third Civil Court, First Judicial District, Monterrey, Nuevo Laredo,
Mexico.

Luminivision
filed suit against Praxis Afinaciones, an indirect wholly owned subsidiary of PACI, seeking payment of 766,000 Mexican Pesos, plus interest at the rate of 5% per month, for
services under a contract. Praxis Afinaciones denies the allegations and is defending the allegations in the lawsuit.

Gulshan Hirji v. Precision Auto Care, Inc., Los Angeles Superior Court, State of California, Case No. BC279492, Filed
August 12, 2002

Gulshan
Hirji, a stockholder of Paisa, Inc. ("Paisa"), filed suit against PACI alleging that PACI breached a contract between PACI and Paisa entered into in June 1998 and
amended in August 1998, and made fraudulent representations and negligent misrepresentations in connection with the alleged contract. The plaintiff seeks damages of $7,000,000, consequential
damages, punitive damages, attorneys' fees, prejudgment interest and such other relief as the Court deems proper. PACI denies the allegations and intends to vigorously defend the allegations in the
lawsuit. PACI seeks a judgment against Gulshan Hirji on her guaranty of a promissory note for $500,000 plus interest and attorneys' fees, and has filed a cross-complaint seeking damages from Hirji in
excess of $1,000,000 based on fraudulent representations made to PACI.

The
case has been consolidated into PACI's suit against Hirji on the note for $500,000. Discovery is just beginning. Mediation is to be completed by November 28, 2003. A
settlement conference is scheduled for January 6, 2004, and trial is scheduled to begin January 20, 2004. There have been no settlement discussions to date.

United Bank, NA v. C. Eugene Deal, Miracle Partners, Inc., Star Auto Center, Inc., Common Pleas Court of Cuyahoga County,
Ohio, Case No. 01-CV0019, Filed January 11, 2001

Miracle
Partners, Inc., a wholly-owned subsidiary of the Company, was party to a confessed judgment of approximately $1.3 million. The subsidiary is currently inactive and
has no assets. As such, management believes this judgment will have no material impact on the Company's consolidated results of operations. Furthermore, the Company believes that it has a meritorious
claim against Mr. Deal for misrepresentations made in connection with PACI's acquisition of Miracle Partners, Inc. in 1997 for all amounts covered by the judgment.

Super Wash Inc. v. Mike Judge, an individual, d/b/a Super Wash fix, d/b/a Wash Pro LLC and Hydro Spray, Case
No. 02-CV-1180, filed in the United States District Court for the Central District of Illinois.

The
plaintiff alleges that it is the owner of a federal trademark "Super Wash", that the defendant Judge has infringed that mark through the use of the name "superwashfix" and that Judge
was acting on behalf of the Company's subsidiary, Hydro Spray Car Wash Equipment Co., Ltd. ("Hydro Spray"). In addition to trademark infringement (both statutory and common law), the plaintiff
has alleged violations of the Lanham Act, the Illinois Uniform Deceptive Trade Practices Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, Tortious Interference and Cyberpiracy
based on alleged use of the term "superwashfix" by Judge. The plaintiff seeks injunctive relief, along with an

44

---

unspecified
amount of monetary damages, costs and reasonable attorneys' fees. Hydrospray denies that Judge was acting on its behalf, denies that it has committed any of the alleged violations and
denies that the plaintiff has been damaged. Discovery has been initiated but not completed. The case is presently set for trial beginning December 18, 2003. The defendant Judge has admitted
limited use of the term "superwashfix" but claims he made no sales in connection therewith and claims to have immediately ceased all use of the term on demand from the plaintiff.

In
August 2003, the parties settled this lawsuit with Hydro Spray agreeing not to use the trademarks owned by Super Wash and each party agreeing to bear its own legal fees.

Threatened Litigation:

Puyallup Auto Stop Associates, Inc. v. PTW, Inc.: By letter dated July 1, 2003, a landlord has asserted a claim against PTW, Inc., a
subsidiary of the Company, for reimbursement of the costs of remediating environmental contamination to the leased premises during the term of the lease, which costs are alleged to exceed $250,000.
Investigation into the Company's liability is ongoing.

The
Company and its subsidiaries are subject to other litigation in the ordinary course of business, including contract, franchise and employment-related litigation. In the course of
enforcing its rights under existing and former franchisee agreements, the Company is subject to complaints and letters threatening litigation concerning the interpretation and applicability of these
agreements, particularly in case of defaults and terminations.

The
Company does not believe that any of the above pending legal proceedings will result in material judgments against the Company. There can be no assurance, however, that these suits
will ultimately be decided in its favor. While any of these suits may result in a material judgment against the Company, which could cause material adverse consequences to its operations, the Company
believes that it has adequately reserved for any adverse judgments.

Item 8.Changes In And Disagreements With Accountants On Accounting And Financial Disclosures

None.

45

---



PART III

Item 9.Directors and Executive Officers of the Registrant

The required information on directors will be contained in the Company's Proxy Statement, and reference is expressly made to the Proxy Statement for the specific
information incorporated in the Form 10-KSB. The required information on executive officers is set forth in Part I of this Form 10-KSB under an unnumbered
item captioned "Executive Officers of Precision Auto Care, Inc."

Item 10.Executive Compensation

The required information will be set forth under "Executive Compensation" and "Report of the Organization and Compensation Committee on Executive Compensation" in
the Company's Proxy Statement, and reference is expressly made to the Proxy Statement for the specific information incorporated in the Form 10-KSB.

Item 11.Security Ownership of Certain Beneficial Owners and Management

The required information will be set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement, and reference
is expressly made to the Proxy Statement for the specific information incorporated in the Form 10-KSB. Except as otherwise stated in the Proxy Statement, the address of each of the
persons owning more than 5% of the Company's Common Stock is 748 Miller Drive, S. E., Leesburg, VA 20175.

Item 12.Certain Relationships and Related Transactions

The required information will be set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement, and reference is expressly
made to the Proxy Statement for the specific information incorporated in the Form 10-KSB.

Item 13.Exhibits and Reports On Form 8-K



46

---



|2.1  |  | Plan of Reorganization and Agreement for Combination of Business dated as of August 27, 1997, by and among the Company, WE JAC Corporation, Miracle Industries, Inc., Lube Ventures, Inc., Rocky Mountain
Ventures, Inc., Rocky Mountain Ventures II, Inc., Miracle Partners, Inc., Prema Properties, LLC, Ralston Car Wash, LLC and KBG LLC, included as an Exhibit to the Company's Registration Statement on Form S-1 (No. 333-34439)
filed August 27, 1997, is incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Articles of Incorporation of the Company included as an exhibit to the Company's Registration Statement on Form S-1 (No. 333-34439) filed August 27, 1997, are incorporated herein by reference.                                                                                                                                                                                                                                                                                                    
|3.2  |  | By-laws of the Company included as an exhibit to the Company's Registration Statement on Form S-1 (No. 333-34439) filed August 27, 1997 are incorporated herein by reference.                                                                                                                                                                                                                                                                                                                       
|3.3  |  | Articles of Amendment to the Articles of Incorporation of Precision Auto Care, Inc. dated October 28, 2002 to create a new series of preferred stock designated as Series A Cumulative Redeemable Preferred Stock, included as an exhibit
to the Company's Quarterly Report on Form 10-QSB, filed November 14, 2002, is incorporated herein by reference.                                                                                                                                           
|3.4  |  | Articles of Amendment to the Articles of Incorporation of Precision Auto Care, Inc. dated January 15, 2003 to increase the number of authorized shares, amend the required number of Board of Directors, and amend the terms of the Board of
Directors, included as an exhibit to the Company's Quarterly Report on Form 10-QSB, filed February 14, 2003, is incorporated herein by reference.                                                                                                      
|4.1  |  | Warrant to Purchase Shares of Common Stock of Precision Auto Care, Inc. dated October 30, 2002 (Warrant No. 2002-01) between the Company and Desarollo Integrado, S. A. de C. V., included as an exhibit to the Company's Quarterly Report
on Form 10-QSB, filed November 14, 2002, is incorporated herein by reference.                                                                                                                                                                            
|4.2  |  | Warrant to Purchase Shares of Common Stock of Precision Auto Care, Inc. dated October 30, 2002 (Warrant No. 2002-02) between the Company and Arthur C. Kellar, included as an exhibit to the Company's Quarterly Report on Form 10-QSB,
 filed November 14, 2002, is incorporated herein by reference.                                                                                                                                                                                              
|10.1 |  | Precision Auto Care, Inc. 1998 Employee Stock Purchase Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-49097), filed April 1, 1998, is incorporated herein by reference.                                                                                                                                                                                                                                                                                  
|10.2 |  | Precision Auto Care Inc. 2000 Outside Directors' Stock Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-39226), filed June 14, 2000, is incorporated herein by reference.                                                                                                                                                                                                                                                                                  
|10.3 |  | Precision Auto Care, Inc. 1998 Outside Directors' Stock Option Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-85877), filed August 25, 1999, is incorporated herein by
reference.                                                                                                                                                                                                                                                                        
|10.4 |  | Precision Auto Care, Inc. 1999 Employee Stock Option and Restricted Stock Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-85879), filed August 25, 1999, is incorporated herein by
reference.                                                                                                                                                                                                                                                             
|10.5 |  | Precision Tune Stock Option Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-47165), filed March 2, 1998, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                             
|10.6 |  | Precision Auto Care Employee Stock Option Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-47169), filed March 2, 1998, is incorporated herein by reference.                                                                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

47

---

|10.7  |  | Precision Auto Care, Inc. Director Stock Option Plan, included as an exhibit to the Company's Registration Statement on Form S-8 (No. 333-47171), filed March 2, 1998, is incorporated herein by reference.                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | Subscription and Stock Purchase Agreement dated as of March 31, 1998, by and among the Company, Precision Auto Care Mexico I, S. de R.L. de C.V., and Promotora de Franquicias Praxis, S.A. de C.V., included as an exhibit to the Company's Current
Report on Form 8-K, filed April 15, 1998, is incorporated herein by reference.
|10.9  |  | Subordinated Debenture Agreement with Board LLC, dated October 15, 1998, included as an exhibit to the Company's Amended Quarterly Report on Form 10-Q/A, filed November 20, 1998, is incorporated herein by reference.                                                                                                            
|10.10 |  | Agreement dated August 3, 2000 between the Company and Louis M. Brown, Jr., included as an Exhibit to the Company's Annual Report on Form 10-K, filed October 13, 2000, is incorporated herein by reference.                                                                                                                       
|10.11 |  | Registration Rights Agreement dated August 4, 2000 among the Company, Louis M. Brown, Jr., Arthur Kellar and Desarollo Integrado, S. A. de C. V., included as an Exhibit to the Company's Annual Report on Form 10-K, filed October 13,
2000, is incorporated herein by reference.                                                 
|10.12 |  | Lease dated December 3, 2001 between Leesburg Airpark III, LLC and Precision Tune Auto Care, Inc., included as an Exhibit to the Company's Annual Report on Form 10-K, filed October 15, 2002, is incorporated herein by
reference.                                                                                                
|10.13 |  | Amended and Restated Registration Rights Agreement dated October 29, 2002 by and among the Company, Louis M. Brown, Jr., Arthur C. Kellar, and Desarollo Integrado, S. A. de C. V., included as an exhibit to the Company's Quarterly Report on
Form 10-QSB, filed November 14, 2002, is incorporated herein by reference.         
|21*   |  | Significant Subsidiaries of the Company.                                                                                                                                                                                                                                                                                           
|23.1* |  | Consent of Grant Thornton LLP, Independent Auditors.                                                                                                                                                                                                                                                                               
|31.1* |  | Written statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            
|31.2* |  | Written statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            
|32.1* |  | Written statement of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            
|32.2* |  | Written statement of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            

---

48

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Item 14.Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.

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SIGNATURES

Pursuant to the requirements 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, on September 25, 2003.

| |  | PRECISION AUTO CARE, INC.
| |  | -------------------------
| |  | By:                      

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

|Signature                                 |  | Title                                                                                         |  | Date              
|----------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ------------------
|                                          |  |                                                                                               |  |                   
|/s/LOUIS M. BROWN, JR.Louis M. Brown, Jr. |  | President, Chief Executive Officer and Director (Principal Executive Officer)                 |  | September 25, 2003
|/s/ROBERT R. FALCONIRobert R. Falconi     |  | Executive Vice President and Chief Operating Officer (Principal Financial Accounting Officer) |  | September 25, 2003
|/s/WOODLEY A. ALLENWoodley A. Allen       |  | Chairman of the Board                                                                         |  | September 25, 2003
|/s/BASSAM N. IBRAHIMBassam N. Ibrahim     |  | Director                                                                                      |  | September 25, 2003
|/s/JOHN D. SANDERSJohn D. Sanders         |  | Director                                                                                      |  | September 25, 2003
|/s/PETER C. KEEFEPeter C. Keefe           |  | Director                                                                                      |  | September 25, 2003

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