**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**Form
      10-K**





R
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT**
              **OF
                1934****For
                the fiscal year ended June 30, 2008****OR******£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT**
              **OF
                1934****For
                the transition period
                from               
                to**





**Commission
      file number 0-24247**









**ATLANTIC
      EXPRESS TRANSPORTATION CORP.**


*(Exact
      name of Registrant as specified in its charter)*





New
                York
            **13-392-4567***(State
                or other jurisdiction of incorporation or
                organization)*
            *(I.R.S.
                Employer Identification No.)***7
                North Street**
              **Staten
                Island, New York 10302**
              **(718)
                442-7000**
              *(Address,
                including zip code, and telephone number, including area
                code,*
              *of
                Registrant’s principal executive
                offices)*





**Securities
      Registered Pursuant to Section 12(b) of the Act:**





**Title
                of Each Class**
            **Name
                of Each Exchange on Which Registered**None
            None





**Securities
      Registered Pursuant to Section 12(g) of the Act:**


None




Indicate
      by check mark whether the Registrant is well-known seasoned issuer, as defined
      in rule 405 of the Securities Act. Yes £ No S





Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes S No £





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





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




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




Large
      accelerated filer £ Accelerated filer £ Non-accelerated filer R   Smaller
      reporting company £





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




The
      aggregate market value of voting and non-voting equity held by non-affiliates
      of
      the Registrant on December 31, 2007 was $0.




ISSUERS
      INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS




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




APPLICABLE
      ONLY TO CORPORATE REGISTRANTS




The
      number of outstanding shares of the Registrant’s common stock, $0.01 par value,
      as of September 26, 2008 was 1,052,665.




DOCUMENTS
      INCORPORATED BY REFERENCE


None












**PART
      1**





**Item
      1. Business.**





**Overview**





We
      are
      Atlantic Express Transportation Corp., a New York corporation. In this document,
      we refer to ourselves as the “Company”, “we”, “us” and “our”. We are the third
      largest provider of school bus transportation in the United States and the
      leading provider in New York City, the largest market in which we operate.
      We
      also provide paratransit services for physically and mentally challenged
      passengers to a public transit system, and we offer fixed route transit, express
      commuter line and charter and tour bus services.





We
      have
      been in operation for over 40 years and have grown from a small local bus
      company with a fleet of 16 buses to one of the largest national school bus
      transportation companies in the country with a fleet of approximately 5,500
      vehicles as of June 30, 2008. We were founded in 1968 as a school bus company
      based in Staten Island, New York. Domenic Gatto, our Chief Executive Officer
      and
      President, commenced employment with us in 1973 and purchased our company in
      1974, at which time we operated only 16 buses. In 1979, we were awarded two
      major school bus transportation contracts by the New York
      City Department of Education (the “DOE”) ,
      which
      substantially increased our revenues. These contracts, which were originally
      awarded for a period of three years, have been extended successively through
      June 30, 2010. From 1982 to 1987, we strengthened our presence in New York
      City through the acquisition of 14 regional school bus transportation companies.
      In 1986, we won and purchased additional contracts in New York City, which
      also
      have been extended successively through June 30, 2010. From 1986 to 1989,
      we further strengthened our presence in New York City through the acquisitions
      of four local contractors and expanded our operations to Nassau and Suffolk
      counties on Long Island, New York, through a combination of acquisitions and
      winning new contracts. From 1990 to 1997, we consummated six additional
      acquisitions in the New York metropolitan area and three acquisitions on Long
      Island, New York. In addition to our expansion in the New York greater
      metropolitan area, we extended our operations to Philadelphia in 1993, where
      we
      were the successful bidder for a new contract, and made subsequent acquisitions
      in 1993 and won additional new contracts in 1996 and 1997. We also established
      operations in St. Louis in 1995 and in Los Angeles in 1997 by winning contracts.





We
      have
      focused on developing our favorable reputation in the areas of passenger safety,
      timeliness and quality of service, key factors used by school bus transportation
      administrators in selecting and renewing our services. We believe the expertise
      we have gained in our long operating history enables us to establish strong
      relationships with our customers and provides us with a competitive advantage
      when renewing contracts or bidding on new business. Customers representing
      approximately 98% of our fiscal year 2008 contract revenue from operations
      have
      been with us for over five years.





On
      November 4, 1998, GSCP II Holdings (AE), LLC, an affiliate of Greenwich
      Street Capital (‘GSC”), acquired an approximately 83% equity interest in our
      recapitalized parent, Atlantic Express Transportation Group, Inc. or (“AETG”),
      which owned all of the issued and outstanding shares of our capital stock at
      that time.





We
      generated revenues from operations of $433.5 million for the fiscal year ended
      June 30, 2008 and incurred a net loss of $34.4 million for the fiscal
      year.




**Business
      Operations**





We
      derive
      our revenue from two segments: School Bus Operations and Paratransit and Transit
      Operations (for additional segment information see Note 18 of Notes to
      Consolidated Financial Statements included elsewhere in this Form
      10-K)





***School
      Bus Operations (89.1% of revenues from operations for the year ended June 30,
      2008)***





We
      have
      contracts to provide school bus transportation in 104 school districts in New
      York, Missouri, Massachusetts, California, Pennsylvania, New Jersey and
      Illinois. As of June 30, 2008, we had a fleet of approximately 5,100 vehicles
      to
      service our school bus operations, consisting of school buses, minivans and
      cars, lift and ramp-equipped vehicles, coaches and service and support vehicles.


2


*Services.* We
      generally provide services for transportation of open enrollment ("Regular
      Education") students through the use of standard school buses, and the
      transportation of physically or mentally challenged ("Special Education")
      students through the use of an assortment of vehicles, including standard school
      buses, passenger vans and lift-gate vehicles, which are capable of accommodating
      wheelchair-bound students. In most jurisdictions serviced by us, escorts are
      required to accompany drivers on Special Education vehicles.





*Contracts.* Our
      school bus transportation contracts are awarded by school districts through
      a
      public bidding or request for proposal ("RFP") process. Our school bus
      transportation contracts have provided a relatively predictable and stable
      stream of revenues over their terms, which initially range from one to five
      years. Compensation under school bus transportation contracts is generally
      based
      upon a daily rate per vehicle, which is established either by public bidding
      or
      by proposal and negotiation with respect to RFP contracts. Contracts in New
      York
      City provide for the payment of the daily vehicle rate for days of scheduled
      performance in accordance with the school calendar and provide for payment
      of
      85% of the daily rate for any vehicle not used due to school cancellations
      on
      any scheduled school day. Daily vehicle rates earned under contract renewals
      are
      generally increased from previous rates by application of the Consumer Price
      Index. Our cost increases have in the past and could in the future outpace
      such
      revenue increases. The number of vehicles required is determined by the school
      districts, initially pursuant to their bid specifications and/or RFP, and is
      subject to change.





Our
      school bus transportation contracts generally provide for performance security
      in one or more of the following forms: performance bonds, letters of credit
      and
      cash retainages. In most instances, we have opted to satisfy our security
      performance requirements by posting performance bonds.





*Customers.* We have
      longstanding relationships with many of the school districts that we service.
      School districts with which we do business generally appoint a business manager
      and/or transportation supervisor to oversee school bus transportation
      operations. Larger school districts have separate bureaus or divisions, which
      regulate and supervise the providing of school bus transportation services.
      Passenger safety, timeliness and quality of service are among the factors used
      by school bus transportation administrators to evaluate us.





In
      our
      experience, unless a school district is dissatisfied with the services of a
      school bus transportation contractor, school districts tend to extend existing
      contracts rather than solicit bids from potential replacement contractors,
      unless applicable law or the terms of the contract otherwise require. We believe
      that replacing an existing contractor through a bidding process generally has
      resulted in higher prices to districts than contract extensions because of
      the
      significant start-up costs that a replacement contractor faces. Bidding also
      exposes a school district to uncertainty in the quality of service that would
      be
      provided by a new contractor.





Historically,
      school districts awarded school bus transportation contracts through a public
      bidding process by which such contracts were required to be awarded to the
      lowest responsible bidder, without regard to quality of service. However,
      management believes that, due in part to the poor performance of certain
      low-priced school bus transportation contractors, school districts will
      increasingly rely on a RFP process, which enables school administrators to
      broaden the factors considered when awarding a contract. Factors such as
      passenger safety, timeliness and quality of service, among others, are generally
      considered under the RFP process. In 1996, the State of New York (where we
      have
      our largest concentration of school bus transportation contracts) adopted
      legislation, which, for the first time, permitted school districts in the State
      of New York to select school bus transportation contractors through a RFP
      process. We believe that because of the reputation we have developed in the
      school bus transportation industry, we are well positioned to obtain contracts
      that are awarded by the RFP process as well as by public bidding. The DOE
      accounted for 53.3%, 53.8% and 51.1% of our total revenues from operations
      in
      fiscal years 2008, 2007 and 2006, respectively. No other customer contributed
      greater than 3.9% of our revenues from operations during these periods.





Most
      of
      the DOE contracts were originally awarded to us in 1979 and have been renewed
      and extended since then. The latest extension occurred in June 2005 and extended
      the contracts through June 30, 2010. Although the DOE has the option to
      reduce our routes, the DOE, since the inception of the first contract, has
      often
      increased the number of routes but has never substantially reduced them. Our
      ability to generate cash flow is heavily dependent on our contracts with the
      DOE, and we expect it to continue in the future.





***Paratransit
      and Transit Operations (10.9% of revenues from operations for the year ended
      June 30, 2008)***





For
      fiscal year 2008, we had one contract to provide paratransit service in New
      York
      City for physically and mentally challenged persons who are unable to use
      standard public transportation. The remainder of our paratransit and transit
      operations revenue comes from fixed route transit, express commuter lines and
      charter and tour bus services. This division is primarily dependant on the
      New
      York City Transit Authority (“TA”) contract which will expire in December 2008.
      We received a preliminary approval
      for a ten year contract with the
      TA commencing January 2009. While
      we anticipate
      the contract being awarded to us prior to the expiration of our current
      contract, there is
      no assurance this contract will be awarded .
      As of
      June 30, 2008, we had a fleet of approximately 400 vehicles to service our
      paratransit and transit operations.


3


To
      enhance passenger safety and to satisfy paratransit contract requirements,
      we
      have instituted a comprehensive driver-training course, which encompasses
      defensive driving, passenger sensitivity, first aid and CPR procedures,
      passenger assistance techniques and detailed information about the disabilities
      of the passengers that we transport. Paratransit services are primarily funded
      by public transit systems.





*Services.* Our
      paratransit services are rendered based upon advance call-in requests for
      transportation, which are primarily scheduled by an independent third party.
      The
      paratransit services operation has developed a substantial degree of expertise
      in developing and providing transportation services required by our physically
      or mentally challenged passengers.





*Contract.* The term
      of our paratransit contract was for five years and has been extended for an
      additional two years to December 2008. Under our paratransit operations
      vehicles, liability insurance and fuel are provided by the transit agency.
      We
      are entitled to a specified charge per hour of vehicle service together with
      other fixed charges. Paratransit users pay a fixed amount per trip determined
      by
      the local transit system governmental entity (which may be equal to or based
      upon prevailing public transportation fees in the jurisdiction in question),
      which is credited against the monthly contract price due from the local transit
      system.





**Seasonality**





The
      school bus transportation operation, which averaged approximately 89.0% of
      our
      revenues from operations for the last three fiscal years, is seasonal in nature
      and generally follows the pattern of the school year, with sustained levels
      of
      business during the months of September through June. As a result, we have
      experienced, and expect to continue to experience, a substantial decline in
      revenues from late June through early September. Our quarterly operating results
      have also fluctuated due to a variety of factors, including variation in the
      number of school days in each quarter (which is affected by the timing of the
      first and last days of the school year, holidays, the month in which spring
      break occurs and adverse weather conditions, which can close schools) and the
      profitability of our other operations. In particular, historically we have
      generated operating losses during the first quarter of each fiscal year.
      Consequently, interim results are not necessarily indicative of the full fiscal
      year and quarterly results may vary substantially, both within a fiscal year
      and
      between comparable fiscal years. See "Management's Discussion and Analysis
      of
      Financial Condition and Results of Operations."





**Focus
      on Passenger Safety and Service**





Management
      has developed a corporate culture focused on passenger safety and service.
      All
      drivers are required to attend periodic safety workshops and training programs,
      which emphasize defensive driving and courteous behavior. We attempt to buy
      school buses which comply with New York State safety regulations, among the
      most
      stringent in the country, which allows us to give our customers the benefit
      of
      the safety features and gives us flexibility in moving or selling vehicles
      in
      our fleet to transportation operators in other states as well. We believe that
      our emphasis on passenger safety and service provides us with a competitive
      advantage and is a major contributor to our success in extending existing
      contracts and winning new contracts.








**Fleet
      Management and Maintenance**





As
      of
      June 30, 2008, we operated a fleet of approximately 5,500 vehicles. The average
      age of our fleet, exclusive of 265 vehicles provided by various transportation
      authorities as of that date, was 8.7 years.





As
      of
      June 30, 2008, the fleet was maintained by our trained mechanics at our
      approximately 50 facilities. We have a comprehensive preventive maintenance
      program for our equipment to minimize equipment down time and prolong equipment
      life. Programs implemented by us include standard maintenance, regular safety
      checks, lubrication, wheel alignments and oil and filter changes, all of which
      are performed on a regularly scheduled basis by our mechanics.





The
      following is a breakdown of our fleet of owned vehicles as of June 30, 2008
      by
      age:





**School**
              **Buses**
            
            **Minivans**
              **And Cars**
            
            **Lift/Ramp**
              **Equipped**
              **Vehicles**
            
            **Coaches**
            
            **Service and**
              **Support**
              **Vehicles**
            
            **Total**Less
                than 2 years old
            
            
            105
            
            
            1
            
            
            5
            
            
            2
            
            
            3
            
            
            1162-5 years
                old
            
            
            344
            
            
            111
            
            
            52
            
            
            4
            
            
            38
            
            
            5496-10 years
                old
            
            
            1,634
            
            
            64
            
            
            207
            
            
            7
            
            
            48
            
            
            1,96011-15 years
                old
            
            
            1,063
            
            
            1
            
            
            88
            
            
            9
            
            
            51
            
            
            1,212Greater
                than 15 years
            
            
            325
            
            
            —
            
            
            40
            
            
            —
            
            
            13
            
            
            378**Total**
            
            
            **3,471**
            
            
            **177**
            
            
            **392**
            
            
            **22**
            
            
            **153**
            
            
            **4,215**


4


The
      following is a breakdown of our fleet of leased vehicles as of June 30, 2008
      by
      age:





**School**
              **Buses**
            
            **Minivans**
              **And Cars**
            
            **Lift/Ramp**
              **Equipped**
              **Vehicles**
            
            **Coaches**
            
            **Service and**
              **Support**
              **Vehicles**
            
            **Total**Less
                than 2 years old
            
            
            258
            
            
            —
            
            
            35
            
            
            14
            
            
            1
            
            
            3082-5 years
                old
            
            
            384
            
            
            29
            
            
            93
            
            
            12
            
            
            1
            
            
            5196-10 years
                old
            
            
            127
            
            
            —
            
            
            —
            
            
            18
            
            
            —
            
            
            14511-15 years
                old
            
            
            25
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            25**Total**
            
            
            **794**
            
            
            **29**
            
            
            **128**
            
            
            **44**
            
            
            **2**
            
            
            **997**





In
      addition to the vehicles in the tables above, as of June 30, 2008, we operated
      265 vehicles provided by various transportation authorities pursuant to their
      respective contracts.





**Employees**





As
      of
      June 30, 2008, we had approximately 7,600 employees to provide transportation
      services, consisting of approximately 5,400 drivers, 1,300 escorts, 500
      maintenance workers and 400 employees in executive, operations, clerical and
      sales functions. Our drivers and escorts are required to undergo background
      checks, drug and alcohol testing and fingerprinting as a condition for
      employment. All drivers are licensed to drive school buses and/or motor coaches
      in accordance with federal and state licensing requirements.





We
      require our drivers to complete a thorough and comprehensive training process
      in
      addition to satisfying federal and state requirements. In some states, such
      as
      New York, a special subclass of license is required for school bus drivers.
      Our
      paratransit drivers are also required to complete special training. Drivers
      undergo a 20-hour basic training course once a year and a two-hour refresher
      class twice per year. In addition, drivers are required to be fingerprinted
      and
      pass a defensive driving test, as well as physical, oral and written tests.
      Further, all drivers must pass a pre-employment drug test as well as random
      drug
      and alcohol tests during the course of each year. Pursuant to federal and state
      law, each year we are required to randomly test 50% of our drivers for drug
      use
      and 25% for alcohol use.





As
      of
      June 30, 2008, approximately 81% of our employees were members of various labor
      unions. At that date we were party to 31 collective bargaining agreements,
      of
      which four agreements, covering approximately 400 employees, have already
      expired. 20 agreements, covering approximately 4,300 employees will expire
      over
      the next two years (including three labor agreements with Local 1181 that will
      expire on June 30, 2009 that will effect approximately 2,700 employees), with
      the remainder to expire over the next three to five years. We
      believe that our relations with employees are satisfactory. As
      of
      June 30, 2008, approximately 53% of the Company’s union employees were
      represented by Local 1181-1061 Amalgamated Transit Union AFL-CIO (“Local 1181”),
      which primarily represents personnel rendering services on behalf of the DOE.
      Labor agreements with Local 1181 require contributions to the Local 1181 welfare
      fund and pension plan on behalf of drivers, mechanics and escorts. All contracts
      awarded by the DOE during the past 25 years contain employee protection
      provisions and require continued contributions to the Local 1181 pension plan
      and welfare fund for rehired employees opting to remain in such plan and such
      fund. Pursuant to a plan amendment approved by the Pension Benefit Guaranty
      Corporation, withdrawal liability for contributing employers to the plan, such
      as our company, is essentially eliminated, provided that withdrawal is based
      upon the loss of DOE contracts and that the successor contractor becomes a
      contributing employer to the plan.


5


**Competition**





The
      school bus transportation industry and paratransit services industry are highly
      competitive. We compete on the basis of our reputation for passenger safety,
      quality of service and price. We believe we are competitive in each of these
      areas. Contracts are generally awarded pursuant to public bidding, where price
      is the primary criteria for a contract award. We have many competitors in the
      school bus and paratransit transportation business, including transportation
      companies with resources and facilities substantially greater than those of
      ours. We compete with First Transit and First Student, divisions of First Group
      America, Inc., the largest private transportation contractor in North
      America, and National Express Corporation the second largest private
      transportation contractor in North America, in addition to other regional and
      local companies.





**Risk
      Management and Insurance**





We
      maintain various forms of liability insurance against claims made by third
      parties for bodily injury or property damage resulting from operations. Such
      insurance consists of (1) general liability insurance of $1.0 million
      per occurrence with a $50,000 deductible against claims arising from other
      (e.g., non-vehicle) liability exposure and (2) our present primary
      $1 million vehicle liability policy, which covers approximately 50% of all
      our vehicles. It does not cover those vehicles providing service to the TA,
      the
      DOE, and our Massachusetts operations.





Under
      our
      primary vehicle liability insurance policy, we pay fronting charges to our
      insurance carrier and we are required to contribute to a loss fund. The carrier
      pays the first $500,000 per occurrence from this loss fund, up to a maximum
      amount determined for each policy period. We are entitled to obtain a refund
      from the carrier based upon a calculation of ratable losses valued as of a
      date
      42 to 54 months after the effective date of the policy. The carrier is
      required to pay for all losses in excess of $500,000, up to $1 million, per
      occurrence and any excess of the aggregate maximum ratable losses agreed to
      for
      that policy period. The TA provides $3 million insurance per occurrence for
      our TA vehicles at no cost to us. The DOE provides $1 million insurance per
      occurrence for our DOE vehicles, for which they deduct an agreed upon amount
      from our monthly invoices. Our Massachusetts vehicles are covered under various
      "First Dollar" policies with no deductibles. In addition, we cover all of our
      vehicles with an additional umbrella policy with a minimum of $10 million per
      occurrence. Beyond the occurrence limits mentioned herein, the vehicle liability
      coverage provides indemnity for an unlimited number of occurrences. Our
      insurance policies provide coverage for a one-year term and therefore, are
      subject to annual renewal.





Under
      our
      primary workers' compensation insurance policy, we pay fronting charges to
      our
      carrier and we are required to contribute to a loss fund. The carrier pays
      the
      first $500,000 per occurrence from this loss fund, up to a maximum amount
      determined for each policy period. We are entitled to obtain a refund from
      the
      carrier based upon a calculation of ratable losses valued as of a date 42 to
      54 months after the effective date of the policy. The carrier is required
      to pay for all losses in excess of $500,000, up to $1 million, per
      occurrence and any excess of the aggregate maximum ratable losses agreed to
      for
      that policy period. Atlantic Escorts, Inc. is covered under a “First Dollar”
policy with no deductibles.




In
      addition, we maintain catastrophic coverage of $25.0 million per
      occurrence, for an unlimited number of occurrences, subject to a $100,000
      deductible per occurrence. This insurance provides replacement cost coverage
      for
      losses on our fleet and insurance against business interruptions resulting
      from
      the occurrence of natural catastrophes, excluding flooding. We also maintain
      property insurance for the replacement cost of all of our real and personal
      property.





**Environmental
      Matters**





Our
      operations are subject to extensive and constantly evolving federal, state
      and
      local environmental and occupational health and safety laws and regulations,
      including laws and regulations governing air emissions, wastewater discharges,
      the storage and handling of chemicals and hazardous substances, and the
      remediation of contaminated soil and groundwater ("Environmental Laws"). We
      take
      into account the requirements of such Environmental Laws in the improvement,
      modernization, expansion and start-up of our facilities. As with most
      transportation companies, we could incur significant costs related to
      environmental compliance or remediation; however, any such cost would most
      likely be incurred over a period of years. Compliance with Environmental Laws
      or
      more vigorous enforcement policies of regulatory agencies, or stricter or
      different interpretations of such laws and future regulatory action regarding
      the presence of hazardous substances in soil or groundwater, may require
      material expenditures by us.





Under
      various Environmental Laws, a current or previous owner or operator of real
      estate may be liable for the costs of removal or remediation of certain
      hazardous substances or petroleum products on, under or in such property,
      without regard to whether the owner or operator knew of, or caused, the presence
      of such substances. The presence of (or failure to properly remediate) such
      substances may adversely affect the ability to sell or rent such real estate
      or
      to borrow using such real estate as collateral. Similarly, persons who generate
      or arrange for the disposal or treatment of hazardous substances may be liable
      for the costs of investigation, remediation or removal of such hazardous
      substances at or from the disposal or treatment facility regardless of whether
      such facility is owned or operated by such persons. Finally, the owner of a
      site
      may be subject to common law claims by third parties based on damages and costs
      resulting from environmental contamination emanating from a site.


6


As
      outlined above, we may be potentially liable for costs related to environmental
      compliance and remediation. We cannot predict with any certainty the costs
      of
      remediation or compliance, including potential penalties, which costs could
      have
      a material adverse effect on us.





**Government
      Regulation**





We
      are
      subject to a wide variety of federal, state and municipal laws and regulations
      concerning (1) vehicle standards and equipment maintenance,
      (2) qualification, training and testing of employees and
      (3) qualification and maintenance of operating facilities. Our vehicles are
      subject to federal motor vehicle safety standards established by the National
      Highway Traffic Safety Administration ("NHTSA"). Specific standards are
      promulgated by NHTSA with regard to school buses pursuant to the School Bus
      Safety Act of 1974. Our vehicles are also subject to the laws and regulations
      of
      each state in which we operate, which are often more stringent than applicable
      federal requirements. For example, in New York State, in addition to federal
      standards, regulations promulgated by the New York State Department of Motor
      Vehicles and the New York State Department of Transportation ("NYSDOT") require
      that school buses be equipped with safety belts (for vehicles manufactured
      after
      1988), high back seats, left-handed emergency door exits, 16-gauge side panels
      and illuminated school bus signs. All school buses and paratransit vehicles
      are
      required to be inspected twice annually by NYSDOT inspectors in accordance
      with
      a rigorous set of standards covering each mechanical component of the vehicles.





Our
      employees are subject to various federal and state laws and regulations
      pertaining to driver qualifications and drug, alcohol and substance abuse
      testing. The Commercial Motor Vehicle Safety Act of 1986 requires drivers of
      commercial vehicles, including school buses, motor coaches and paratransit
      vehicles, to obtain a commercial driver's license. Many states have additional
      licensing requirements for subclasses of drivers such as school bus drivers
      and/or paratransit drivers. Under regulations enacted at the state and/or local
      levels, our school bus drivers and paratransit drivers are required to complete
      certain minimum basic training and refresher classes annually. Our drivers
      are
      kept up to date with changes in applicable regulations through these refresher
      classes. Pursuant to regulations promulgated by the United States Department
      of
      Transportation under the Drug Free Workplace Act of 1988, our drivers are
      required to undergo pre-employment drug and alcohol testing, and we are required
      to conduct random testing for drug and/or alcohol abuse. Similar drug and
      alcohol abuse testing is also required under various state laws. Our operating
      and maintenance facilities are also required to be maintained in accordance
      with
      regulations promulgated by various federal and state agencies, including
      departments of education, departments of motor vehicles, and state departments
      of transportation.





**Item
      1A.** **Risk
      Factors.**





**Risk
      Factors Relating to Our Business**




***Our
      business is dependent upon school bus transportation contracts with school
      districts, which contracts may not be renewed or
      rebid.***





Historically,
      our school bus transportation contracts have had initial terms between one
      and
      five years, generally subject to extension, where permitted by law, upon
      expiration at the discretion of the school districts with our agreement for
      additional contract periods. Although since 1979 we have achieved a
      substantially high contract renewal rate, the decision to renew contracts is
      not
      made solely
      by
      us and may be based upon factors beyond our control. Any significant decrease
      in
      this historical renewal rate could have a material adve rse
      effect on us. There can be no assurance that any of our current or future
      contracts will be extended, or if extended, that the rates of compensation
      for
      such extensions will be acceptable to us. Moreover, there can be no assurance
      that the school districts that currently employ our services will not seek
      to
      satisfy their transportation needs in the future by alternative means. A loss
      of
      a significant number of contracts, or those contracts which account for a
      significant percentage of our revenues, would have a material adverse effect
      on
      our results of operations.





***Our
      bankruptcy reorganizations could harm our business, financial condition and
      results of operations.***





In
      December 2003, we emerged from reorganization under Chapter 11 of the
      United States Bankruptcy Code. As of June 30, 2008, we have recorded liabilities
      of approximately $0.1 million for priority tax claims, certain cure costs
      and claims to be negotiated for leases and contracts, collectively recorded
      as
      payable to creditors under our plan of reorganization. Our past inability to
      meet our obligations that resulted in our filing for bankruptcy protection,
      or
      the perception that we may not be able to meet our obligations in the future,
      could adversely affect our ability to obtain adequate financing and our
      relationships with our customers, as well as our ability to retain or attract
      high-quality employees.


7


***We
      may be adversely affected by rising insurance costs.***





Our
      cost
      of maintaining vehicle liability, personal injury, property damage and workers'
      compensation insurance is significant. We could experience higher insurance
      premiums as a result of adverse claims experience or because of general
      increases in premiums by insurance carriers for reasons unrelated to our own
      claims experience. As an operator of school buses and other high occupancy
      vehicles, we are exposed to claims for personal injury or death and property
      damage as a result of accidents. Our insurance policies must be renewed
      annually. Our ability to continue to obtain insurance at affordable premiums
      also depends upon our ability to continue to operate with an acceptable safety
      record. A significant increase in the number of claims against us, the assertion
      of one or more claims in excess of our policy limits or the inability to obtain
      adequate insurance coverage at acceptable rates, or at all, could have a
      material adverse effect on us. In addition, the running of statutes of
      limitations for personal injuries to minor children typically is suspended
      during the children's legal minority. Therefore, it is possible that accidents
      causing injuries to minors on school buses may not give rise to lawsuits until
      a
      number of years later, which could also have a material adverse effect on us.





Additionally,
      we typically negotiate transportation contracts on a different time frame than
      our contracts for insurance and our transportation contracts are typically
      fixed
      price contracts. As a result, we were unable to absorb increases in insurance
      and other operating expenses in recent years. Our inability to pass on changes
      in underlying costs was a significant reason for our seeking protection from
      creditors in our Chapter 11 bankruptcy case. We cannot assure you that such
      increases in insurance and other expenses will not happen again in the future.
      See "Business—Risk Management and Insurance."





***Fluctuations
      in the cost of fuel could adversely affect our
      business.***





We
      operated a fleet of approximately 5,500 vehicles as of June 30, 2008 and consume
      substantial quantities of fuel for our operations. Our fuel costs for the year
      ended June 30, 2008 were approximately $30.3 million as compared to
      $21.8 million for the year ended June 30, 2007. Historically, we have been
      unable to pass through most increases in the price of fuel to the school
      districts we service. From time to time in the past, we have entered into
      hedging contracts to protect ourselves from fluctuations in the cost of fuel
      and
      we may seek to do the same in the future. Based on our current operations,
      an
      increase in fuel costs of 10 cents per gallon will increase our cost of fuel
      purchased by approximately $0.9 million on an annual basis. No assurance
      can be given that we will be able to adequately protect ourselves from
      fluctuating fuel costs.





***We
      may not be able to maintain letters of credit or performance bonds required
      by
      our transportation contracts.***





Our
      school bus transportation contracts generally provide for performance security
      in one or more of the following forms: performance bonds, letters of credit
      and
      cash retainages. There can be no assurance that either letters of credit or
      performance bonds will continue to be available to us as security for our
      contracts or, if available, at a cost that does not adversely affect our margins
      or cash flow. All school bus contracts can be terminated by school districts
      for
      not meeting certain performance related criteria.





***Some
      of our transportation contracts may be terminated or services to be provided
      reduced due to factors beyond our control.***





Some
      of
      our school bus transportation contracts may be terminated due to factors beyond
      our control, such as decreases in funding for our customers. Paratransit
      contracts may be cancelled on short notice at the option of our customers.
      In
      addition, the number of school buses to be provided under our contracts may
      decrease, and hence the revenues generated under such contracts may decrease
      based on the requirements of our customers. Although we believe we have
      established strong relationships with our customers, there can be no assurance
      that our contracts will not be affected by circumstances beyond our control.





***Our
      fixed contract rates may not be sufficient to absorb future cost
      increases.***





The
      school bus transportation industry is characterized by fixed price contracts
      between transportation companies and municipalities, or school districts whereby
      changes in underlying costs to transportation companies are not automatically
      passed along to the customer. Our inability to pass on our insurance costs
      was a
      significant reason for our seeking protection from our creditors in our Chapter
      11 bankruptcy case. Our contracts for school bus transportation and paratransit
      services have average terms of one to five years. We set contract rates when
      we
      enter into such contracts, often before other expenses have been firmly
      established, for the duration of the transportation contract, and before we
      have
      complete knowledge of the costs of insurance, labor and other expenses. After
      we
      have established contract rates, we may be unable to adjust them for cost
      increases in insurance, labor and other expenses. We have been able to leverage
      our relationships with our customers to achieve high contract renewal rates
      with
      price increases and obtain concessions in some existing contracts to absorb
      cost
      increases to maintain profitability levels. We cannot assure you that the price
      increases in our contracts will be sufficient to absorb any cost increases
      in
      the future or that we will be able to obtain concessions in existing contracts
      to absorb cost increases in the future.


8


***We
      may incur additional labor costs due to labor unions and collective bargaining
      agreements.***





As
      of
      June 30, 2008, approximately 81% of our employees were members of various labor
      unions. At that date we were party to 31 collective bargaining agreements,
      of
      which four agreements, covering approximately 400 employees, have already
      expired. 20 agreements, covering approximately 4,300 employees will expire
      over
      the next two years (including three labor agreements with Local 1181 that will
      expire on June 30, 2009 that will effect approximately 2,700 employees), with
      the remainder to expire over the next three to five years. Although no assurance
      can be given, we do not believe that the expiration of such collective
      bargaining agreements will have a material adverse effect on our labor costs.
      No
      assurance can be given as to the outcome of negotiations with the
      representatives of the unionized employees.





Our
      labor
      contracts are not necessarily for the same terms as our revenue contracts.
      Although we believe that historically we have had satisfactory labor relations
      with our employees and their unions, our inability to negotiate acceptable
      union
      contracts in the future or a deterioration of labor relations could result
      in
      strikes or work stoppages and increased operating costs as a result of higher
      wages or benefits paid to union members, which would have a material adverse
      effect on us. In addition, labor shortages in selected markets could materially
      adversely affect our ability to enter or expand in such markets. There can
      be no
      assurance that we will not have a strike or work stoppage in the future. See
      "Business—Employees."





Several
      officers of Local 1181 have been convicted of engaging in criminal activity
      including the extortion of student transportation companies. We have been
      informed by the US Attorney’s office that we are not a target or subject of its
      investigation. No assurance can be given that the change in the union leadership
      will not have a material averse effect on the Company’s labor relations.





***We
      may be adversely affected by a shortage of qualified drivers and possible
      resulting increase in labor costs.***





As
      of
      June 30, 2008, we had approximately 7,600 employees to provide transportation
      services, including approximately 5,400 drivers. We require our drivers to
      complete a thorough and comprehensive training process and to satisfy federal
      and state requirements. There may be a shortage of qualified drivers due to
      factors that are beyond our control, such as competition from other available
      employment opportunities, including opportunities outside the industry in which
      we operate. As a result, we may be required to increase driver compensation
      to
      attract and retain a sufficient number of qualified drivers to service existing
      routes or possible future expansion routes, and such increases may be material.
      Even if we are able to offer significant increases in an amount acceptable
      to
      us, there is no assurance that we will be able to meet all of our needs for
      qualified drivers. An inability to do so could affect our ability to provide
      services as required on existing business and prevent us from obtaining future
      business.





***We
      may be adversely affected by environmental
      requirements.***





Our
      operations are subject to extensive and constantly evolving federal, state
      and
      local environmental and occupational health and safety laws and regulations,
      including laws and regulations governing air emissions, wastewater discharges,
      the storage and handling of chemicals and hazardous substances and the
      remediation of contaminated soil and groundwater. Additional expenditures,
      beyond those currently included in capital and operating budgets, may be
      incurred in order to comply with either new environmental legislation and
      regulations, new interpretations of existing laws and regulations or more
      rigorous enforcement of such laws and regulations. It is not possible to predict
      whether these new expenditures will be material. We may also be subject to
      liability for the investigation and remediation of environmental contamination
      (including contamination caused by other parties) at properties that we own
      or
      operate and at other properties where we or our predecessors have operated
      or
      arranged for the disposal of hazardous substances. We are not presently aware
      of
      any such liabilities or environmental compliance obligations that we believe
      will have a material adverse effect on our business or operations. However,
      we
      cannot make assurances that such liabilities or compliance obligations will
      not
      increase in the future or will not become material. See "Business —
Environmental Matters."


9


***We
      may be adversely affected by current and new governmental laws and
      regulations.***





We
      are
      required to comply with laws and regulations relating to safety, driver
      qualifications, insurance and other matters promulgated by various federal
      and
      state regulatory agencies including, among others, state motor vehicle agencies,
      state departments of education, the Federal Highway and Safety Administration,
      the National Highway Traffic Safety Administration and the Occupational Safety
      and Health Administration. We are also required to comply with certain statutes,
      such as the Americans with Disabilities Act. We have incurred, and expect to
      incur, costs for our operations to comply with these legal requirements, and
      these costs could increase in the future. Many of these legal requirements
      provide for substantial fines, orders, including orders to cease operations,
      and
      criminal sanctions for violations. Although we believe we are in material
      compliance with applicable safety laws and regulations, it is difficult to
      predict the future development of such laws and regulations or their impact
      on
      our business or results of operations. We anticipate that standards under these
      types of laws and regulations will continue to tighten and that compliance
      will
      require increased capital and other expenditures. Furthermore, we cannot predict
      whether new laws or regulations will be adopted and, if adopted, no assurance
      can be given that the implementation of such laws or regulations and any
      additional compliance costs associated therewith will not have a material
      adverse effect on us. Also, a significant order or judgment against us, the
      loss
      of a significant permit or license or the imposition of a significant fine
      or
      any other liability in excess of, or not covered by, our insurance could
      adversely affect our business, financial condition and results of operations.
      See "Business—Government Regulation."





***We
      have significant capital expenditure requirements.***





In
      order
      to maintain our school bus fleet, we will be required to make significant
      capital expenditures. We normally make non-vehicle capital expenditures of
      approximately $5 million annually, plus capital expenditures for vehicles,
      which
      amount varies from year to year depending on our company's needs and business
      conditions. For the years ended June 30, 2007 and June 30, 2008 the majority
      of
      our new vehicle requirements were financed though operating leases. For the
      fiscal years ended June 30, 2006, 2007 and 2008, we made total capital
      expenditures of $6.5 million ($1.4 million of vehicle capital expenditure),
      $18.2 million ($13.7 million of vehicle capital expenditure including $12.1
      million buy out of existing operating leases in May 2007) and $10.8 million
      ($5.9 million of vehicle capital expenditure), respectively. There can be no
      assurance that cash flow from operations will enable us to acquire a sufficient
      number of new vehicles or make capital expenditures necessary to implement
      any
      expansion of service. If we are required to obtain additional financing, there
      can be no assurance that we can obtain financing on terms acceptable to us.
      Our
      inability to procure the financing necessary to acquire additional school buses
      or make needed capital improvements could delay or prevent us from implementing
      our business strategy and would have a material adverse effect on us. See
      "Business—Fleet Management and Maintenance."





***We
      depend on management and key personnel.***





Domenic
      Gatto, who is our Chief Executive Officer and President, is key to our
      management and direction. The loss of the services of Mr. Gatto could have
      a material adverse effect on us, and there can be no assurance that we would
      be
      able to find a replacement for Mr. Gatto with the equivalent business
      experience and skills. Mr. Gatto's current employment contract with us
      expires in December 2009, which is subject to renewal at our option.





***The
      interests of our significant shareholders may be different than your
      interests.***





As
      of
      June 30, 2008, GSC beneficially owned 83.9% of AETG's outstanding common shares.
      AETG owns 91.6% of our issued and outstanding common shares on a fully diluted
      basis. Pursuant to a stockholders agreement for AETG's common shares, GSC is
      entitled to designate a majority of the directors to AETG's board of directors
      so long as it beneficially owns at least 35% of AETG's outstanding common
      shares. As a result, the directors appointed by GSC are in a position to control
      all matters affecting AETG and our company. Such concentration of ownership
      may
      have the effect of preventing a change in control. Further, as a result, GSC
      will continue to have the ability to elect and remove directors and determine
      the outcome of matters presented for approval by our shareholders. The interests
      of our significant shareholder may not be fully aligned with and could conflict
      with, the interests of the holders of our Senior Secured Notes due 2012 (the
      “notes”).





***We
      may be adversely affected by substantial competition in the school bus
      transportation industry and increased consolidation within the
      industry.***





The
      school bus transportation industry is highly competitive and we expect that
      there will continue to be substantial competition for contract bidding and
      for
      prospective acquisitions. Such competition may decrease the profitability
      associated with any contract and increase
      the cost of acquisitions. Contracts are generally awarded pursuant to public
      bidding, where price is the primary criteria for a contract award. We have
      many
      competitors in the school bus transportation business, including transportation
      companies with resources and facilities substantially greater
      than ours. There can be no assurance that we will be able to identify, acquire
      or profitably manage additional contracts. In addition, there can be no
      assurance that either school bus transportation contracts or acquired businesses
      will achieve anticipated levels of profitability. Although we have historically
      been competitive in the market for new contracts as well as for acquisitions
      of
      other companies, there can be no assurance that we will be able to compete
      effectively in the future.


10


In
      particular, the school bus transportation industry is undergoing significant
      consolidation that has intensified the competition for contracts and
      acquisitions. From time to time, we make inquiries with respect to possible
      acquisitions and from time to time have received inquiries with respect to
      a
      possible acquisition of our company. Whether such inquiries will result in
      further communications, or ultimately, an acquisition, has depended and will
      depend upon the facts and circumstances in each case. Any failure to compete
      effectively could have a material adverse effect on us. See
      "Business—Competition" and "Business—Business Operations—School Bus Operations."





***Our
      business is subject to seasonality and fluctuations in quarterly operating
      results.***





The
      school bus transportation operation, which accounted for at approximately 89.0%
      of our revenues from operations for each of the last three fiscal years, is
      seasonal in nature and generally follows the pattern of the school year, with
      sustained levels of business during the months of September through June. As
      a
      result, we have experienced, and expect to continue to experience, a substantial
      decline in revenues from late June through early September. Our quarterly
      operating results have also fluctuated due to a variety of factors, including
      variation in the number of school days in each quarter (which is affected by
      the
      timing of the first and last days of the school year, holidays, the month in
      which spring break occurs and adverse weather conditions, which can close
      schools) and the profitability of our other operations. In particular,
      historically we have generated operating losses during the first quarter of
      each
      fiscal year. Consequently, interim results are not necessarily indicative of
      the
      full fiscal year and quarterly results may vary substantially, both within
      a
      fiscal year and between comparable fiscal years. See "Management's Discussion
      and Analysis of Financial Condition and Results of Operations."





**Risk
      Factors Relating to the Notes**





***Our
      substantial indebtedness could adversely affect our financial condition and
      prevent us from fulfilling our obligations under the
      notes.***




As
      of
      June 30, 2008, we had total indebtedness of $193.0 million (net of
      unamortized original issue discount of $2.1 million). Our
      substantial indebtedness could have important consequences to you and our
      company and significant effects on our business, including the
      following:




•
            make
                it more difficult for us to satisfy our obligations with respect
                to the
                notes and our other indebtedness and contractual and commercial
                commitments and, if we fail to comply with these requirements, an
                event of
                default could result;




•
            increase
                our vulnerability to general adverse economic and industry
                conditions;




•
            require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our indebtedness, thereby reducing the availability of
                our
                cash flow to fund working capital, capital expenditures and other
                general
                corporate purposes;




•
            limit
                our flexibility in planning for, or reacting to, changes in our business
                and the industry in which we
                operate;




•
            place
                us at a competitive disadvantage compared to our competitors that
                have
                less debt; and




•
            limit
                our ability to borrow additional
                funds.




The
      occurrence of any one of these events could have a materially adverse effect
      on
      our business, financial condition, results of operations, prospects and ability
      to satisfy our obligations under the notes.




***Restrictive
      covenants in our Amended and Restated Credit Facility, the indenture governing
      the notes and our other current and future indebtedness could adversely restrict
      our operating flexibility.***




The
      discretion of our management with respect to certain business matters may be
      limited by covenants contained in our Amended and Restated Credit Facility
      and
      the indenture governing the notes, as well as other current and future debt
      instruments. Among other things, these covenants may include restrictions on
      our
      ability to:




•
            incur
                or guarantee additional indebtedness or issue disqualified capital
                stock;




•
            pay
                dividends or make other
                distributions;




•
            issue
                capital stock of our restricted
                subsidiaries;




•
            transfer
                or sell assets, including capital stock of our restricted
                subsidiaries;




•
            make
                certain investments or
                acquisitions;


11




•
            grant
                liens on our assets;




•
            incur
                dividends or other payment restrictions affecting our restricted
                subsidiaries;




•
            enter
                into certain transactions with affiliates;
                and




•
            merge,
                consolidate or transfer all or substantially all of our
                assets.




In
      addition, the credit agreement governing our Amended and Restated Credit
      Facility includes other and more restrictive covenants including those that
      will
      restrict our ability to prepay our other indebtedness, including the notes,
      while borrowings under our Amended and Restated Credit Facility remain
      outstanding. Our Amended and Restated Credit Facility requires us to achieve
      a
      specified LTM EBITDA under certain conditions. Our ability to comply with this
      covenant may be affected by events beyond our control.




The
      restrictions contained in the indenture governing the notes and the credit
      agreement governing our Amended and Restated Credit Facility could:




•
            limit
                our ability to plan for or react to market conditions or meet capital
                needs or otherwise restrict our activities or business plans;
                and




•
            adversely
                affect our ability to finance our operations, acquisition opportunities
                or
                other capital needs or to engage in other business activities that
                would
                be in our interest.




A
      breach
      of any of the restrictive covenants or our inability to comply with the EBITDA
      covenant (if required under certain conditions) could result in a default under
      the credit agreement governing our Amended and Restated Credit Facility. If
      a
      default occurs, the lenders under our Amended and Restated Credit Facility
      may
      elect to:




•
            declare
                all borrowings outstanding, together with accrued interest and other
                fees,
                to be immediately due and payable;
                and




•
            prevent
                us from making payments on the
                notes,




either
      of
      which would result in an event of default under the indenture governing the
      notes and could result in a cross default under our other debt instruments.
      The
      lenders would also have the right in these circumstances to terminate any
      commitments they have to provide us with further borrowings. If the borrowings
      under our Amended and Restated Credit Facility and the notes were to be
      accelerated, we cannot assure you that we would be able to repay in full the
      notes.




***Despite
      current indebtedness levels and restrictive covenants, we may still be able
      to
      incur substantial additional debt, which could exacerbate the risks described
      above.***




We
      may be
      able to incur additional debt in the future. Although the indenture governing
      the notes and the credit agreement governing our Amended and Restated Credit
      Facility contain restrictions on our ability and the ability of our restricted
      subsidiaries to incur indebtedness, those restrictions are or will be subject
      to
      a number of exceptions and qualifications and, under certain circumstances,
      debt
      incurred in compliance with these restrictions could be substantial. For
      example, the indenture governing the notes will allow us to incur additional
      indebtedness if our consolidated fixed charge coverage ratio, after giving
      effect to the incurrence, is greater than 2.0 to 1.0 and also allow us to borrow
      money to buy out our existing vehicle operating leases. In addition, if we
      are
      able to designate some of our restricted subsidiaries under the indenture
      governing the notes as unrestricted subsidiaries, those unrestricted
      subsidiaries would be permitted to borrow beyond the limitations specified
      in
      the indenture and engage in other activities in which restricted subsidiaries
      may not engage. In addition, the indenture governing the notes will not prevent
      us from incurring obligations that do not constitute indebtedness. Adding new
      debt to current debt levels could intensify the leverage-related risks that
      we
      and our subsidiaries now face.




***To
      service our indebtedness, we will require a significant amount of cash. Our
      ability to generate cash depends on many factors beyond our control.***




Our
      ability to make payments on the notes and our other indebtedness and to fund
      planned capital expenditures will depend on our ability to generate cash in
      the
      future. This, to a certain extent, is subject to general economic, financial,
      competitive, legislative, regulatory and other factors that are beyond our
      control.




Based
      on
      our current level of operations and anticipated operating improvements, we
      believe that our cash flow from operations, available cash and available
      borrowings under our Amended and Restated Credit Facility should be adequate
      to
      meet our liquidity needs for the next year. However, we cannot assure you that
      our business will generate sufficient cash flow from operations or that future
      borrowings will be available to us under our Amended and Restated Credit
      Facility in an amount sufficient to enable us to pay our indebtedness, including
      the notes, or to fund our other liquidity needs.


12




If
      we do
      not have sufficient funds, we may be required to sell assets or incur additional
      debt. We may need to refinance all or a portion of our indebtedness, including
      the notes, on or before their stated maturity. We cannot assure you that we
      will
      be able to refinance any of our indebtedness, including our Amended and Restated
      Credit Facility and the notes, on commercially reasonable terms, or at all.
      In
      addition, the terms of existing or future debt agreements may restrict us from
      adopting any of these alternatives. The failure to generate sufficient cash
      flow
      or to achieve any of these alternatives could materially adversely affect the
      value of the notes and our ability to pay the amounts due under the
      notes.




***We
      have a history of net losses and may incur additional losses in the
      future.***





We
      sustained net losses of $29.6 million, $17.1 million and
      $34.4 million for the fiscal years ended 2006, 2007, and 2008,
      respectively. Future losses could adversely affect our ability to fund planned
      capital expenditures and to make payments on the notes. As a result, you could
      lose all or part of your investment. See "Management's Discussion and Analysis
      of Financial Condition and Results of Operations."




***We
      may not have access to the cash flow and other assets of our subsidiaries that
      may be needed to make payments on the notes.***




We
      are a
      holding company that derives all of our operating income and cash flow from
      our
      subsidiaries and accordingly, our ability to make payments on the notes is
      dependent on the earnings and the distribution of funds from our subsidiaries.
      However, none of our subsidiaries is obligated to us to make funds available
      for
      payment on the notes. Our subsidiaries will be permitted to incur additional
      indebtedness that may limit the making of distributions, the payment of
      dividends or the making of loans by such subsidiaries to us. We cannot assure
      you that the agreements governing the current and future indebtedness of our
      subsidiaries will permit our subsidiaries to provide us with sufficient
      dividends, distributions or loans to fund payments on these notes when
      due.




***The
      value of the collateral securing the notes may not be sufficient to satisfy
      our
      and our subsidiaries’ obligations under the notes.***




The
      notes
      and the related guarantees are not secured by a first priority lien on all
      of
      our assets. The notes and the related guarantees are secured by a first priority
      lien, subject to certain permitted prior liens, on all but one of our and our
      guarantor subsidiaries’ owned real properties and certain of our and our
      guarantor subsidiaries’ hereafter acquired real properties (the ‘‘first lien
      real property’’) and on substantially all of our and our guarantor subsidiaries’
owned motor vehicles, other than those constituting excluded assets, whether
      now
      owned or hereafter acquired, other than motor vehicles which are subject to
      purchase money liens (the ‘‘motor vehicles,’’ and together with the first lien
      real property, the ‘‘first lien collateral’’). The lenders under our Amended and
      Restated Credit Facility have a first priority lien on substantially all of
      our
      and our guarantor subsidiaries’ assets, subject to certain permitted prior
      liens, other than the first lien collateral and certain excluded assets (the
      ‘‘second lien collateral’’), and a second priority lien on the first lien real
      property. The notes benefit from a second priority lien on the second lien
      collateral. The lenders under our Amended and Restated Credit Facility do not
      have a lien on the motor vehicles.




The
      proceeds from the sale of the first lien collateral may not be sufficient to
      pay
      all amounts owed on the notes. The first lien collateral may be less liquid
      than
      the second lien collateral. Additionally, the amount to be received upon the
      sale of such collateral will depend on many factors, as more fully described
      in
      the risk factor ‘‘—The collateral securing the notes may be reduced or diluted
      under certain circumstances.’’ We cannot assure you that the liquidation value
      of the first lien collateral would be adequate to repay the principal amount
      of,
      or premium, if any, and any accrued and unpaid interest on all of the
      outstanding notes.




The
      lenders under our Amended and Restated Credit Facility will be entitled to
      receive proceeds from any sale of the second lien collateral to repay their
      obligations in full before the holders of the notes will be entitled to any
      proceeds from any such sale of the second lien collateral. The proceeds from
      the
      second lien collateral may not be sufficient to repay both the lenders under
      our
      Amended and Restated Credit Facility and the holders of the notes. We cannot
      assure you that, in the event of a foreclosure, the proceeds from the sale
      of
      all second lien collateral would be sufficient to pay in full all obligations
      secured by the first priority liens on such collateral or any portion of the
      amounts owed under the outstanding notes.




If
      the
      proceeds from the sale of the first lien collateral and the second lien
      collateral were not sufficient to repay all obligations secured by such
      collateral, then the holders of the notes, to the extent not repaid from the
      proceeds of the sale of the first lien collateral and second lien collateral,
      would only have an unsecured claim against our remaining assets, if any. This
      claim would rank equal in priority to the unsecured claims with respect to
      any
      unsatisfied obligations under our Amended and Restated Credit Facility and
      our
      other unsecured senior indebtedness and the unsecured senior indebtedness of
      our
      guarantor subsidiaries.




We
      have
      not performed any recent appraisals on the value of the collateral. The book
      value of the collateral should not be relied on as a measure of realizable
      value
      for such assets. By their nature, portions of the collateral may be illiquid
      and
      may have no readily ascertainable market value. In addition, a significant
      portion of the collateral includes assets that may only be usable, and thus
      retain value, as part of our existing operating businesses. Accordingly, any
      such sale of the collateral separate from the sale of certain operating
      businesses may not be feasible or of significant value. Also, an entity that
      forecloses on the real property comprising a portion of the collateral is
      potentially liable for environmental claims. See the risk factor ‘‘—Because the
      collateral includes real property, the holders of the notes may be liable under
      limited circumstances for environmental claims related to real property.’’ In
      addition, the collateral is located in a number of locations, and the
      multi-jurisdictional nature of any foreclosure on the collateral may limit
      the
      realizable value of the collateral.


13




The
      ability of the trustee to foreclose on the collateral on behalf of the holders
      of the notes may also be subject to perfection, the consent of third parties,
      governmental approvals and practical problems associated with the realization
      of
      the collateral agent’s security interest in the collateral. We have not obtained
      the consent of third parties whose consent may be necessary to allow the
      collateral agent to foreclose on the collateral consisting of contract rights
      or
      collateral as to which third parties have contractual rights. We cannot assure
      you that the consents of such third parties or any required approvals of
      governmental entities will be given when required to facilitate a foreclosure
      on
      such assets.




***Holders
      of the notes will not control decisions regarding the second lien collateral.***




We
      entered into security documents which granted the administrative agent for
      the
      lenders under our Amended and Restated Credit Facility a first lien on the
      second lien collateral, and gave the administrative agent certain rights with
      respect to the second lien collateral. The collateral agent entered into an
      intercreditor agreement with the administrative agent which will define the
      rights of the parties with respect to the second lien collateral and the
      parties’ liens thereon. The administrative agent and the lenders under our
      Amended and Restated Credit Facility, who have a first priority lien on the
      second lien collateral, control substantially all matters related to the second
      lien collateral and the collateral agent’s rights and remedies with respect
      thereto. At any time that obligations are outstanding under our Amended and
      Restated Credit Facility, the administrative agent shall have the sole and
      exclusive right to control, administer, account for and otherwise deal with
      the
      second lien collateral and to determine the manner of every sale or other
      disposition of the second lien collateral, in each case, upon enforcement of
      the
      administrative agent’s interest, and to foreclose on the second lien collateral
      in any order which it deems appropriate. As a result, the administrative agent
      for the lenders may dispose of or foreclose on, or take other actions with
      respect to, the second lien collateral with which the holders of the notes
      may
      disagree or that may be contrary to the interests of the holders of the notes.
      Also, the collateral agent and the holders of the notes will be unable to
      exercise remedies with respect to the second lien collateral unless and until
      the administrative agent for the lenders exercises its rights and remedies
      with
      respect to the second lien collateral, and then only on a limited basis.




***The
      sale of assets constituting collateral securing the notes may be used to repay
      our obligations on our Amended and Restated Credit
      Facility.***




Certain
      asset sales, including certain sales of assets constituting first lien
      collateral or second lien collateral, are subject to compliance with a covenant
      contained in the indenture governing the notes. Under that covenant, we are
      permitted to use the proceeds from such asset sales to repay outstanding
      indebtedness under our Amended and Restated Credit Facility. Any such repayment
      need not cause any permanent reduction in borrowing capacity under our revolving
      credit facility. Our Amended and Restated Credit Facility requires us to offer
      to use the proceeds from any such asset sale (including sales of first lien
      collateral) to repay outstanding obligations under it. Therefore, the value
      of
      the collateral securing the notes may diminish as a result of any such asset
      sales, and the proceeds therefrom may not be reinvested in the Company or used
      to make an offer to redeem the notes.




***The
      collateral securing the notes may be reduced or diluted under certain
      circumstances, including the issuance of additional notes.***




The
      value
      of the collateral and the amount to be received upon a sale of such collateral
      will depend upon many factors including, among others, the condition of the
      collateral, the ability to sell the collateral in an orderly sale, the condition
      of national and local economies, the availability of buyers and similar factors.
      To the extent that other persons enjoy liens, including statutory liens, whether
      or not permitted by the indenture governing the notes, such persons may have
      rights and remedies with respect to the collateral securing the notes that,
      if
      exercised, could reduce the proceeds available to satisfy the obligations under
      the notes.




The
      indenture governing the notes requires us to issue, and, in certain
      circumstances, permits us to issue thereunder and without limitation on the
      maximum principal amount, additional notes on substantially identical terms
      as
      the notes. Any additional notes subsequently issued will be secured equally
      and
      ratably with the outstanding notes. The issuance of additional notes will have
      the effect of diluting the value of the security interest in the first lien
      collateral and second lien collateral for then outstanding notes. Such dilution
      will reduce your pro rata share of any proceeds from the sale of any first
      lien
      collateral and second lien collateral.




The
      indenture governing the notes and the agreements governing our other secured
      indebtedness may also permit us to designate one or more of our restricted
      subsidiaries as an unrestricted subsidiary. If we designate an unrestricted
      subsidiary, all of the liens on any collateral owned by the unrestricted
      subsidiary and any guarantee of the notes by the unrestricted subsidiary will
      be
      released under the indenture, but the guarantee of our Amended and Restated
      Credit Facility by the unrestricted subsidiary may not be released under our
      Amended and Restated Credit Facility. Designation of an unrestricted subsidiary
      will reduce the aggregate value of the collateral to the extent that liens
      on
      the assets of the unrestricted subsidiary are released and the notes will be
      structurally subordinated to the debt and other obligations of the unrestricted
      subsidiary. This may materially reduce the collateral securing the notes.


14




***Rights
      of holders of the notes in the collateral may be adversely affected by the
      failure to perfect security interests in certain collateral acquired in the
      future.***




The
      security interest in the collateral securing the notes and the guarantees
      includes certain of our assets and certain assets of substantially all of our
      subsidiaries, both tangible and intangible, whether now owned or acquired or
      arising in the future. With respect to certain subsequently acquired property
      and rights, including, without limitation, motor vehicles and deposit accounts,
      the security interest securing the notes will not be perfected unless
      appropriate action (e.g., noting the lien on the related certificate of title
      or
      giving the trustee control over the deposit account) is taken to perfect the
      security interest on or after the time that we or our guarantor subsidiaries
      acquire rights therein. There can be no assurance that the trustee will monitor,
      or that we will inform the trustee of, the future acquisition of property and
      rights that constitute collateral, and that the necessary action will be taken
      to properly perfect the security interest in such after acquired collateral.
      The
      trustee for the notes has no obligation to monitor the acquisition of additional
      property or rights that constitute collateral or the perfection of any security
      interests therein. Such failure may result in the loss of perfection of the
      security interest therein or the priority of the security interest in favor
      of
      the notes against third parties. Moreover, in the event that we or our guarantor
      subsidiaries were to file for bankruptcy, the security interest securing the
      notes generally will not extend to any property or rights acquired by us or
      our
      guarantor subsidiaries after the date of such bankruptcy.




***Holders
      of the notes may not have a perfected security interest in the motor vehicle
      or
      the real property portion of the collateral.***




The
      first
      lien collateral securing the notes includes all but one of our and our guarantor
      subsidiaries’ owned real properties and certain of our and our guarantor
      subsidiaries’ hereafter acquired real properties and on substantially all of our
      and our guarantor subsidiaries’ owned motor vehicles, other than those
      constituting excluded assets, whether now owned or hereafter acquired. Each
      state has its own laws regarding the recording of liens and the perfection
      of
      security interest in motor vehicles in general. Typically, in order to perfect
      a
      security interest in motor vehicles, the lien must be noted or transcribed
      on
      the face of the title. There are inherent delays in the process of perfecting
      such security interests and security interests in our motor vehicles which
      still
      may not be recorded. For so long as the security interest in any motor vehicle
      collateral remains unperfected, such security interest may not be enforceable
      against another secured creditor of ours or our guarantor subsidiaries and,
      in
      the event that we or our guarantor subsidiaries were to become bankrupt, would
      not be enforceable against any bankruptcy trustee of ours or our guarantor
      subsidiaries.




Additionally,
      holders of the notes may not have a perfected security interest in the real
      property portion of the collateral. Typically, in order to perfect a security
      interest in real property, a mortgage must be filed at the county recorder’s
      office in the county in which such real property is located. During such time
      as
      the security interest in the real property collateral remains unperfected,
      such
      security interest may not be enforceable against another secured creditor of
      ours or our guarantor subsidiaries and, in the event that we or our guarantor
      subsidiaries were to become bankrupt, would not be enforceable against any
      bankruptcy trustee of ours or our guarantor subsidiaries.




***Because
      the collateral includes real property, holders of the notes may be liable under
      limited circumstances for environmental claims related to the real property.***




A
      portion
      of the collateral securing the notes and the guarantees is comprised of real
      property. The real property portion of the collateral may be subject to known
      and unforeseen environmental risks. Under the Comprehensive Environmental
      Response, Compensation and Liability Act of 1980, or CERCLA, a lender may be
      held liable for the costs of remediating or preventing releases, or threatened
      releases, of hazardous substances at mortgaged property if the lender takes
      title to the property by foreclosure, or even if the lender does not foreclose,
      but exercises actual control over operations or decision-making. However, the
      1996 amendments to CERCLA established certain protections from such liability
      for lenders who do not act as owners or operators of the property. A lender
      who
      holds indicia of ownership, such as title or rights of access and inspection,
      primarily to protect its security interest, or who forecloses and then re-sells
      or re-leases a property in which it holds a security interest within a
      commercially reasonable time, is not liable as an owner or operator under CERCLA
      unless that lender participates in the management of the property. Participation
      in management is generally interpreted to mean exercising actual control or
      decision-making authority over general operations or over environmental
      compliance at the facility. There may also be other bases for lender liability,
      such that a lender’s involvement in operational decisions or environmental
      compliance matters may create liability under the common law or other
      environmental statutes, both state and federal. A lender’s CERCLA liability is
      not limited by the value of the secured interest and could extend to the entire
      cost of the remediation. As a result, a holder of the notes who is determined
      to
      be an owner or operator of real property securing the notes may have joint
      and
      several liability in a cost recovery or contribution action under CERCLA. This
      liability would not be limited by the principal amount of the notes held by
      the
      holder of the notes or the value of the real property. See
‘‘Business—Environmental Matters.’’




***Third
      party claims may significantly diminish the value of our real property
      collateral.***




The
      title
      insurance policies on the real property portion of the collateral may contain
      exceptions as to rights of third parties. Third parties may make claims that
      they are entitled to exercise such rights in a manner which is adverse to our
      real estate interests and/or improvements. If any such claims are pursued and
      upheld, this may significantly diminish the value, if any, of such real property
      collateral. In addition, we may be required to take corrective action as a
      result of such claims, including procuring additional real estate interests
      and/or relocating improvements, and we may sustain costs, expenses and/or a
      reduction in revenue as a result of such circumstances. These reductions in
      value, costs, expenses and losses associated with excepted matters would not
      be
      covered by title insurance. Insolvency and administrative laws could adversely
      affect noteholder’s ability to enforce its rights under the notes, the note
      guarantees and the security documents. If a bankruptcy proceeding were to be
      commenced under the federal bankruptcy laws by or against us or any subsidiary
      guarantor, it is likely that delays will occur in any payment upon acceleration
      of the notes and in enforcing remedies under the related indenture, including
      with respect to the liens securing the notes and the note guarantees, because
      of
      specific provisions of such laws or by a court applying general principles
      of
      equity. Provisions under federal bankruptcy laws or general principles of equity
      that could result in the impairment of your rights include, but are not limited
      to: the automatic stay; avoidance of preferential transfers by a trustee or
      debtor-in-possession; substantive consolidation; limitations on collectability
      of unmatured interest or attorney fees; fraudulent conveyance; and forced
      restructuring of the notes, including reduction of principal amounts and
      interest rates and extension of maturity dates, over the holders’
objections.


15




Additionally,
      applicable federal bankruptcy laws generally permit a debtor to continue to
      retain and to use collateral, even if the debtor is in default under the
      applicable debt instruments, provided that the secured creditor is given
‘‘adequate protection.’’ The interpretation of the term ‘‘adequate protection’’
may vary according to circumstances, but it is intended, in general, to protect
      the value of the secured creditor’s interest in collateral. Because the term
‘‘adequate protection’’ is subject to varying interpretation and because of the
      broad discretionary powers of a bankruptcy court, it is impossible to predict
      (1) whether payments under any of the notes would be made following commencement
      of and during a bankruptcy case, (2) whether or when the lenders under the
      Amended and Restated Credit Facility could foreclose upon or sell any collateral
      or (3) whether or to what extent holders of the notes would be compensated
      for
      any delay in payment or loss of value of the collateral under the doctrine
      of
‘‘adequate protection.’’ Furthermore, in the event a bankruptcy court were to
      determine that the value of the collateral was not sufficient to repay all
      amounts due on the notes, the holders of such notes would become holders of
      ‘‘under-secured claims.’’ Applicable federal bankruptcy laws generally do not
      permit the payment or accrual of interest, costs and attorneys’ fees for
‘‘under-secured claims.’’




***The
      notes and the note guarantees and the granting of the collateral securing the
      note guarantees may be voidable, subordinated or limited in scope under laws
      governing fraudulent transfers and insolvency.***




Although
      the notes are our obligations, they will be unconditionally guaranteed on a
      senior secured basis by the subsidiary guarantors. We are a holding company
      that
      derives all of our operating income and cash flow from our subsidiaries. The
      performance by each subsidiary guarantor of its obligations with respect to
      its
      subsidiary guarantee may be subject to review under relevant federal and state
      fraudulent conveyance and similar statutes in a bankruptcy or reorganization
      case or lawsuit by or on behalf of unpaid creditors of such subsidiary
      guarantor. Under these statutes, if a court were to find under relevant federal
      or state fraudulent conveyance statutes that a subsidiary guarantor did not
      receive fair consideration or reasonably equivalent value for incurring its
      subsidiary guarantee of the notes, and that, at the time of incurrence, the
      subsidiary guarantor (1) was insolvent, (2) was rendered insolvent by reason
      of
      the incurrence or grant, (3) was engaged in a business or transaction for which
      the assets remaining with the subsidiary guarantor constituted unreasonably
      small capital or (4) intended to incur, or believed that it would incur, debts
      beyond its ability to pay these debts as they matured, then the court, subject
      to applicable statutes of limitation, could void the subsidiary guarantor’s
      obligations under its subsidiary guarantee, recover payments made under the
      subsidiary guarantee, subordinate the subsidiary guarantee to other indebtedness
      of the subsidiary guarantor or take other action detrimental to the holders
      of
      the notes.




The
      measure of insolvency for these purposes will depend upon the governing law
      of
      the relevant jurisdiction. Generally, however, a company will be considered
      insolvent for these purposes if the sum of that company’s debts is greater than
      the fair value of all of that company’s property or if the present fair salable
      value of that company’s assets is less than the amount that will be required to
      pay its probable liability on its existing debts as they become absolute and
      matured or if a company is not able to pay its debts as they become due.
      Moreover, regardless of solvency, a court could void an incurrence of
      indebtedness, including the subsidiary guarantees, if it determined that the
      transaction was made with the intent to hinder, delay or defraud creditors.
      In
      addition, a court could subordinate the indebtedness, including the subsidiary
      guarantees, to the claims of all existing and future creditors on similar
      grounds. The subsidiary guarantees could also be subject to the claim that,
      since the subsidiary guarantees were incurred for our benefit, and only
      indirectly for the benefit of the subsidiary guarantors, the obligations of
      the
      subsidiary guarantors thereunder were incurred for less than reasonably
      equivalent value or fair consideration. Neither we nor any subsidiary guarantor
      believes that, after giving effect to the offering, any of the subsidiary
      guarantors (1) was insolvent or rendered insolvent by the incurrence of the
      guarantees in connection with the offering, (2) was not in possession of
      sufficient capital to run their business effectively or (3) incurred debts
      beyond our or its ability to pay as the same mature or become due.




There
      can
      be no assurance as to what standard a court would apply in order to determine
      whether a subsidiary guarantor was ‘‘insolvent’’ upon the sale of the notes or
      that, regardless of the method of valuation, a court would not determine that
      the subsidiary guarantor was insolvent at the time of the sale of the
      notes.




***Our
      ability to purchase the notes upon a change of control may be limited.***




Upon
      the
      occurrence of a specified change of control, each holder of notes will have
      the
      right to require us to repurchase all or a portion of such holder’s notes at a
      price in cash equal to 101% of their principal amount, plus accrued and unpaid
      interest, if any, to the date of repurchase. However, our ability to repurchase
      the notes upon a change of control may be limited by the terms of our then
      existing contractual obligations and the obligations of our subsidiaries. In
      addition, the occurrence of a change of control is expected to require the
      repayment of borrowings under our Amended and Restated Credit Facility. There
      can be no assurance that we will have the financial resources to repay amounts
      due under our Amended and Restated Credit Facility, or to repurchase or redeem
      the notes. If we fail to repurchase all of the notes tendered for purchase
      upon
      the occurrence of a change of control, this failure will constitute an event
      of
      default under the indenture. See the risk factor ‘‘—Our substantial indebtedness
      could adversely affect our financial condition and prevent us from fulfilling
      our obligations under the notes’’ above.


16




With
      respect to the sale of assets referred to in the definition of ‘‘change of
      control’’ under the indenture, the meaning of the phrase ‘‘all or substantially
      all’’ as used in that definition varies according to the facts and circumstances
      of the subject transaction, has no clearly established meaning under the
      relevant law and is subject to judicial interpretation. Accordingly, in certain
      circumstances there may be a degree of uncertainty in ascertaining whether
      a
      particular transaction would involve a disposition of ‘‘all or substantially
      all’’ of the assets of a person and therefore it may be unclear whether a change
      of control has occurred and whether the notes are subject to an offer to
      repurchase.




The
      change of control provision may not necessarily afford the holders protection
      in
      the event of a highly leveraged transaction, including a reorganization,
      restructuring, merger or other similar transaction involving us that may
      adversely affect the holders, because these transactions may not involve a
      shift
      in voting power or beneficial ownership or, even if they do, may not involve
      a
      shift of the magnitude required under the definition of ‘‘change of control’’
under the indenture to trigger these provisions. Except as upon a “change of
      control” under the indenture, the indenture does not contain provisions that
      permit the holders of the notes to require us to repurchase or redeem the notes
      in the event of a takeover, recapitalization or similar
      transaction.




***The
      collateral is subject to casualty risks.***




We
      are
      obligated under the collateral arrangements to maintain adequate insurance
      or
      otherwise insure against hazards as is usually done by corporations operating
      properties of a similar nature in the same or similar localities. There are,
      however, certain losses that may be either uninsurable or not economically
      insurable, in whole or in part. As a result, it is possible that the insurance
      proceeds will not compensate us fully for our losses. If there is a total or
      partial loss of any of the pledged collateral, we cannot assure you that any
      insurance proceeds received by us will be sufficient to satisfy all of our
      secured obligations, including the notes.




***The
      ability of the collateral agent to foreclose on the collateral may be limited
      pursuant to bankruptcy laws.***




The
      right
      of the collateral agent, as a secured party under the collateral documents
      for
      the benefit of itself, the trustee and the holders of the notes, to foreclose
      upon and sell the collateral upon the occurrence of a payment default is likely
      to be significantly impaired by applicable bankruptcy laws, including the
      automatic stay provision contained in Section 362 of the Bankruptcy Code. Under
      applicable federal bankruptcy laws, a secured creditor is prohibited from
      repossessing its security from a debtor in a bankruptcy case, or from disposing
      of security repossessed from such a debtor, without bankruptcy court approval.
      Moreover, applicable federal bankruptcy laws generally permit a debtor to
      continue to retain and use collateral even though that debtor is in default
      under the applicable debt instruments so long as the secured creditor is
      afforded ‘‘adequate protection’’ of its interest in the collateral. Although the
      precise meaning of the term ‘‘adequate protection’’ may vary according to
      circumstances, it is intended in general to protect a secured creditor against
      any diminution in the value of the creditor’s interest in its collateral.
      Accordingly, the bankruptcy court may find that a secured creditor is
‘‘adequately protected’’ if, for example, the debtor makes certain cash payments
      or grants the creditor liens on additional or replacement collateral as security
      for any diminution in the value of the collateral occurring for any reason
      during the pendency of the bankruptcy case.




In
      view
      of the lack of a precise definition of the term ‘‘adequate protection’’ and the
      broad discretionary powers of a bankruptcy court, we cannot predict whether
      payments under the notes would be made following commencement of, and during
      the
      pendency of, a bankruptcy case, whether or when the collateral agent could
      foreclose upon or sell the collateral or whether or to what extent holders
      of
      notes would be compensated for any delay in payment or loss of value of the
      collateral. Furthermore, if a bankruptcy court determines that the value of
      the
      collateral is not sufficient to repay all amounts due on the notes, holders
      of
      notes would hold ‘‘under-secured claims.’’ Applicable federal bankruptcy laws do
      not permit the payment or accrual of interest, costs and attorney’s fees for
‘‘under-secured claims’’ during a debtor’s bankruptcy case.




None
      of
      our future foreign subsidiaries or unrestricted domestic subsidiaries, if any,
      will guarantee the notes. If any of our future foreign subsidiaries or
      unrestricted domestic subsidiaries becomes insolvent, liquidates, reorganizes,
      dissolves or otherwise winds up, holders of its indebtedness and its trade
      creditors generally will be entitled to payment on their claims from the assets
      of such subsidiary before any of those assets would be made available to us.
      Consequently, holders’ claims in respect of the notes effectively would be
      subordinated to all of the existing and future liabilities of our future foreign
      subsidiaries and our unrestricted domestic subsidiaries, if any.




***There
      is no or only a limited public trading market for the notes, and holder’s
      ability to sell the notes is limited.***




There
      is
      no existing public market for the notes. No assurances can be made that any
      liquid market will develop for the notes or that holders of the notes will
      be
      able to sell their notes, and no assurances can be made concerning the price
      at
      which the holders will be able to sell their notes. Future trading prices of
      the
      notes will depend on many factors, including, among other things, prevailing
      interest rates, our operating results and the market for similar securities.
      Accordingly, no market for the notes may develop, and any market that develops
      may not persist. We did not apply for listing of the notes on any securities
      exchange or other market, other than on PORTAL. The liquidity of the trading
      market and the trading price of the notes may be adversely affected by changes
      in our financial performance or prospects and by changes in the financial
      performance of or prospects for companies in our industry generally. As a
      result, holders may be required to bear the financial risk of their investment
      in the notes indefinitely.


17




***The
      trading price of the notes may be volatile.***




Historically,
      the market for non-investment grade debt has been subject to disruptions that
      have caused substantial volatility in the prices of securities similar to the
      notes. Any such disruptions could adversely affect the prices at which holders
      may sell their notes. In addition, subsequent to their initial issuance, the
      notes may trade at a discount from the initial offering price of the notes,
      depending on the prevailing interest rates, the market for similar notes, our
      performance and other factors, many of which are beyond our control.





**Item
      1B. Unresolved Staff Comments.**


None.





**Item
      2. Properties.**





Our
      subsidiaries provide services from approximately 50 facilities for buses (of
      which five are owned) in seven states. The facilities are utilized for repair
      and maintenance and/or administrative purposes. We believe that our facilities
      are adequate to service our present business and the currently anticipated
      expansion of existing operations.





The
      following table details the facilities that we own and our material leased
      facilities, used for our school bus operations and paratransit and transit
      operations.





**Location**
            
            **Ownership**
            
            **Sq.
                Ft.**Medford,
                NY
            
            
            Owned
            
            
            280,000Oceanside,
                NY
            
            
            Owned
            
            
            220,000South
                Hampton, NJ
            
            
            Owned
            
            
            210,000Ridgewood,
                NY
            
            
            Owned
            
            
            203,158Setauket,
                NY
            
            
            Owned
            
            
            68,000Maspeth,
                NY
            
            
            Leased
            
            
            120,000Los
                Angeles, CA
            
            
            Leased
            
            
            159,587Staten
                Island, NY
            
            
            Leased
            
            
            144,292St.
                Louis, MO
            
            
            Leased
            
            
            244,000Jamaica,
                NY
            
            
            Leased
            
            
            225,000Bronx,
                NY
            
            
            Leased
            
            
            223,000Brooklyn,
                NY
            
            
            Leased
            
            
            186,840Bronx,
                NY
            
            
            Leased
            
            
            147,000Bronx,
                NY
            
            
            Leased
            
            
            208,000





**Item
      3. Legal Proceedings.**





From
      time
      to time, we are involved in litigation that we consider to be in the normal
      course of business. We are not presently involved in any legal proceedings
      that
      we expect individually or in the aggregate to have a material adverse effect
      on
      our financial condition, results of operations or liquidity.





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




None.


18


**PART
      II**





**Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.**




As
      of
      June 30, 2008 our authorized capital stock consisted of 1,303,200 common shares,
      par value $.01 per share, based upon an amendment to our certificate of
      incorporation, effective April 21, 2004, whereby we split our authorized
      capital stock. AETG owns 945,263 shares of our common stock. In
      May
      2008, we issued 87,030 common shares, representing 8.4% of our then outstanding
      common shares, pursuant to the timely exercise of warrants which had been issued
      in connection with our previously outstanding 12% Senior Secured Notes due
      2008
      and Senior Secured Floating Rate Notes due 2008 (collectively, the “Old Notes”).
      In July 2008, we issued 20,362 common shares pursuant to the exercise of
      warrants which had been issued in connection with out previously outstanding
      third priority senior secured notes. As of
      June 30, 2008, GSC and its affiliates owned 83.9% of outstanding common shares
      of AETG. There is no established public trading market for the Company’s common
      shares.





Holders
      of outstanding common shares are entitled, for each share held, to one vote
      upon
      each matter submitted to a vote at a meeting of our shareholders.





Holders
      of our common shares are entitled to receive a pro rata share of dividends
      when,
      as and if declared by us out of funds legally available for the payment of
      dividends and to participate pro rata in liquidating distributions. Our ability
      to pay dividends is limited by agreements governing our indebtedness, including
      the notes and our Amended and Restated Credit Facility.





Our
      board
      of directors may authorize the issuance of fractions of shares represented
      by a
      certificate, or uncertificated, which shall entitle the holder to exercise
      voting rights, receive dividends and participate in liquidating distributions,
      in proportion to the fractional holdings; or it may authorize the payment in
      cash of the fair value of fractions of shares at the time when those entitled
      to
      receive such fractions are determined; or in lieu of fractional shares it may
      authorize the issuance, as permitted by law, of scrip exchangeable as therein
      provided for full shares, but such scrip shall not entitle the holder to any
      rights of a shareholder, except as therein provided.





**AETG**





AETG
      is
      authorized to issue 1,650,000 common shares, par value $0.001 per share. As
      of
      June 30, 2008, 128,240 common shares of AETG have been issued and are
      outstanding.





Holders
      of outstanding AETG common shares are entitled, for each share held, to one
      vote
      upon each matter submitted to a vote at a meeting of its shareholders. Holders
      of AETG's common shares are entitled to receive a pro rata share of dividends,
      when, as and if declared by AETG out of funds legally available for the payment
      of dividends and to participate pro rata in liquidating distributions. AETG
      does
      not presently anticipate that dividends will be paid on the common shares in
      the
      foreseeable future.





AETG's
      certificate of incorporation prohibits issuances or redemptions of common
      shares, issuances of warrants or options (other than certain compensatory
      options), and transfers of AETG's common shares by GSC until the earlier of
      the
      third anniversary of the effectiveness of the plan of reorganization or when
      AETG's board of directors determines that the restrictions do not provide AETG
      with significant tax benefits. Holders of AETG's common shares have no
      subscription, redemption or conversion rights.





AETG
      is
      authorized to issue 500,000 preferred shares, par value $0.001 per share, of
      which 100,000 shares have been designated as Series E Convertible Preferred
      Stock (the “Series E Preferred Stock”). As of June 30, 2008, 75,543.58 shares of
      Series E Preferred Stock were outstanding.





Holders
      of the Series E Preferred Stock are not entitled to any voting rights except
      as
      required by law and as provided under AETG’s certificate of amendment governing
      the Series E Preferred Stock. The holders of the Series E Preferred Stock are
      entitled to dividends at the rate of 10% per annum payable quarterly in shares
      of Series E Preferred Stock. Each share of the Series E Preferred Stock is
      convertible into one share of AETG common stock, at any time following (i)
      a
      liquidation event, (ii) a bona fide public offering of AETG common shares
      resulting in proceeds of at least $50 million, or (iii) receipt of a notice
      of
      redemption. In the event of a liquidation, dissolution or winding up of AETG
      or
      of a change in control, merger or sale of substantially all the assets of AETG,
      the Series E Preferred Stock is entitled to liquidation preference (senior
      to
      all other capital stock of AETG) in the amount of $84.77 per share. The Series
      E
      Preferred Stock is subject to mandatory redemption in April 2009 on the first
      anniversary date of the original maturity date of our Old Notes at a price
      of
      $84.77 per share.


19


**Item
      6. Selected Financial Data.**





You
      should read the information set forth below in conjunction with our
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations" and our consolidated financial statements and related notes included
      elsewhere in this Form 10-K.





We
      derived the Statement of Operations Data and the Other Financial Data for the
      years ended June 30, 2006, 2007 and 2008 and the Balance Sheet Data as of
      June 30, 2007 and 2008 from our audited financial statements included
      elsewhere in this 10-K. We derived the Statement of Operations Data for the
      years ended June 30, 2004 and June 30, 2005 and the Balance Sheet Data as
      of June 30, 2004, 2005 and June 30, 2006 from our audited financial
      statements that are not included in this Form 10-K.





**Fiscal
                Year Ended June 30,****2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2008****(Dollars
                in thousands)****Statement
                of Operations Data:**Revenues:School
                bus operations
            
            $
            321,466
            
            $
            319,605
            
            $
            368,065
            
            $
            381,968
            
            $
            386,297Paratransit
                and transit operations
            
            
            42,055
            
            
            44,071
            
            
            45,993
            
            
            46,849
            
            
            47,231Total
                revenues
            
            
            363,521
            
            
            363,676
            
            
            414,058
            
            
            428,817
            
            
            433,528Cost
                of operations:Cost
                of operations—school bus operations
            
            
            285,650
            
            
            299,854
            
            
            330,738
            
            
            338,914
            
            
            355,682Cost
                of operations—paratransit and transit operations
            
            
            34,988
            
            
            38,603
            
            
            39,504
            
            
            41,619
            
            
            41,923General
                and administrative
            
            
            17,927
            
            
            17,858
            
            
            19,055
            
            
            17,861
            
            
            17,804Depreciation
                and amortization
            
            
            26,287
            
            
            25,029
            
            
            28,199
            
            
            19,093
            
            
            19,024Contract
                rights impairment
            
            
            5,463
            
            
            959
            
            
            —
            
            
            —
            
            
            268Income
                (loss) from operations
            
            
            (6,794
            )
            
            (18,627
            )
            
            (3,440
            )
            
            11,330
            
            
            (1,173
            )Other
                income (expense):Interest
                expense(1)
            
            
            (25,196
            )
            
            (23,514
            )
            
            (25,941
            )
            
            (34,759
            )
            
            (33,349
            )Reorganization
                costs(2)
            
            
            (11,177
            )
            
            (566
            )
            
            (569
            )
            
            (80
            )
            
            (82
            )Forgiveness
                of indebtedness income(3)
            
            
            101,493
            
            
            —
            
            
            —
            
            
            —
            
            
            —Other
            
            
            49
            
            
            363
            
            
            401
            
            
            492
            
            
            210Income
                (loss) before income taxes and discontinued operations
            
            
            58,375
            
            
            (42,344
            )
            
            (29,549
            )
            
            (23,017
            )
            
            (34,394
            )Benefit
                from (provision for) income taxes
            
            
            (477
            )
            
            214
            
            
            —
            
            
            300
            
            
            35Income
                (loss) before discontinued operations
            
            
            57,898
            
            
            (42,130
            )
            
            (29,549
            )
            
            (22,717
            )
            
            (34,359
            )Income
                (loss) from discontinued operations
            
            
            (1,080
            )
            
            (296
            )
            
            (2
            )
            
            5,613
            
            
            —Net
                income (loss)
            
            $
            56,818
            
            $
            (42,426
            )
            $
            (29,551
            )
            $
            (17,104
            )
            $
            (34,359
            )


20





**As
                of June 30,****2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2008****(Dollars
                in thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            3,742
            
            $
            6,835
            
            $
            501
            
            $
            6,882
            
            $
            2,683Accounts
                receivable, net
            
            
            46,971
            
            
            44,832
            
            
            46,085
            
            
            50,787
            
            
            48,422Property,
                plant and equipment, net
            
            
            149,078
            
            
            124,522
            
            
            93,478
            
            
            91,982
            
            
            83,042Total
                assets
            
            
            256,330
            
            
            247,005
            
            
            213,426
            
            
            206,726
            
            
            180,054Total
                debt
            
            
            139,041
            
            
            166,460
            
            
            163,048
            
            
            191,663
            
            
            192,958Shareholders’
                equity (deficit)
            
            
            66,480
            
            
            24,977
            
            
            (33
            )
            
            (17,088
            )
            
            (51,596
            )











(1)
            Contractual
                interest was $32.6 million for the fiscal year ended June 30,
                2004.





(2)
            For
                the fiscal year ended June 30, 2004 reorganization costs consisted
                primarily of fees for both our restructuring advisors and our creditors'
                restructuring advisors and legal counsel. For the fiscal years ending
                June
                30, 2005, 2006 and 2007 reorganization costs were primarily legal
                counsel
                and United States trustee fees.





(3)
            As
                a result of our plan of reorganization becoming effective, liabilities
                that were subject to compromise were settled, which resulted in the
                recognition of forgiveness of indebtedness income based upon the
                estimated
                settlement amounts.





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





The
      following discussion should be read in conjunction with the "Selected Financial
      Data" and our historical consolidated financial statements, including the notes
      thereto, included elsewhere in this Form 10-K.





**General**





We
      are
      the third largest provider of school bus transportation in the United States
      and
      the leading provider in New York City, the largest market in which we operate.
      We have contracts with 104 school districts in New York, Missouri,
      Massachusetts, California, Pennsylvania, New Jersey and Illinois. For fiscal
      year 2008, we had a contract to provide paratransit services in New York City
      to
      physically and mentally challenged passengers who are unable to use standard
      public transportation. We also provide other transportation services, including
      fixed route transit, express commuter line and charter and tour buses through
      our coach services. As of June 30, 2008, we operated a fleet of approximately
      5,500 vehicles operating from approximately 50 facilities.





School
      bus transportation services accounted for 88.9%, 89.1% and 89.1% of our revenues
      from operations in our fiscal years ended June 30, 2006, 2007 and 2008,
      respectively. Our school bus transportation contracts have provided a relatively
      predictable and stable stream of revenues over their terms, which generally
      range from one to five years. Since 1979, we have achieved
      substantial contract renewals, which we believe is due to (1) our
      reputation for passenger safety and providing efficient, on-time service,
      (2) our long standing relationships with the school districts we service,
      (3) the preference of school districts to maintain continuity of service
      with their current proven contractor rather than risk the uncertainty associated
      with a replacement and (4) the disadvantage of prospective competitors, who
      generally would have to make substantially greater investments than we would
      in
      new equipment and who may experience difficulty obtaining suitable parking
      and
      maintenance facilities in our primary markets, especially in the New York City
      greater metropolitan area.





The
      daily
      price charged per vehicle varies, depending upon a wide range of factors
      including (1) vehicle type (standard school buses, minivans, or vehicles
      with wheelchair lifts), (2) the nature of service to be provided
      (transportation of regular enrollment students or transportation of physically
      or mentally challenged students), (3) special requirements of a particular
      school district concerning age of vehicles and/or upgrades on equipment and
      (4) the cost of labor. Wages and related labor costs are the most
      significant factors in our cost structure. In urban areas, particularly those
      with a strong union presence, the cost of providing school bus transportation
      is
      substantially greater than in suburban and rural areas, where wages are
      generally lower. As a result, prices paid by school districts vary accordingly.


21


School
      bus transportation revenues have historically been seasonal, based on the school
      year and holiday schedules. During the months of September through June, our
      fleet of school buses has been generally fully utilized. Historically, during
      the summer months, only a portion of our school buses have been required to
      fulfill our summer contracts for school and camp activities and special trips.





The
      paratransit and transit services operations accounted for 11.1%, 10.9%, and
      10.9% of our revenues from operations in our fiscal years ended June 30, 2006,
      2007 and 2008, respectively. The terms of our paratransit contracts initially
      range from one to five years. The contracts are awarded by public transit
      systems through a public bidding or RFP process. We are generally entitled
      to a
      specified charge per hour of vehicle service together with other fixed charges.
      The method of contract compensation also varies.





The
      principal elements of our cost of operations are wages and related labor costs,
      fuel, parts, vehicle insurance, workers' compensation insurance and rent.
      Historically, the vast majority of our cost of operations have varied directly
      in proportion to revenues As of June 30, 2008, approximately 81% of our
      employees were members of various labor unions. At that date we were party
      to 31
      collective bargaining agreements, of which four agreements, covering
      approximately 400 employees, have already expired. 20 agreements, covering
      approximately 4,300 employees will expire over the next two years (including
      three labor agreements with Local 1181 that will expire on June 30, 2009 that
      will effect approximately 2,700 employees), with the remainder to expire over
      the next three to five years. We believe that our relations with employees
      are
      satisfactory.





General
      and administrative expenses include costs primarily associated with our
      headquarters in Staten Island, New York, as well as terminal office and
      managerial salaries. We believe that we currently have sufficient staff to
      support anticipated revenue levels. Cost increases are anticipated to be offset
      somewhat as our business grows and we realize economies of scale by spreading
      the cost of the administrative staff and facilities over a larger revenue base.




**Results
      of Operations**


**Year
                  Ended June 30,****2006**
              
              **2007**
              
              **2008****(Dollars
                  in millions)**Revenues
              
              $
              414.1
              
              
              100.0
              %
              $
              428.8
              
              
              100.0
              %
              $
              433.5
              
              
              100.0
              %Cost
                  of operations
              
              
              370.2
              
              
              89.4
              %
              
              380.5
              
              
              88.7
              %
              
              397.6
              
              
              91.7
              %General
                  and administrative
              
              
              19.1
              
              
              4.6
              %
              
              17.9
              
              
              4.2
              %
              
              17.8
              
              
              4.1
              %Depreciation
                  and amortization
              
              
              28.2
              
              
              6.8
              %
              
              19.1
              
              
              4.5
              %
              
              19.0
              
              
              4.4
              %Contract
                  rights impairment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              0.3
              
              
              0.1
              %Income
                  (loss) from operations
              
              
              (3.4
              )
              
              (0.8
              )%
              
              11.3
              
              
              2.6
              %
              
              (1.2
              )
              
              (0.3
              )%Interest
                  expense
              
              
              25.9
              
              
              6.3
              %
              
              34.8
              
              
              8.1
              %
              
              33.3
              
              
              7.7
              %Loss
                  before discontinued operations
              
              $
              (29.5
              )
              
              (7.1
              )%
              $
              (22.7
              )
              
              (5.3
              )%
              $
              (34.4
              )
              
              (7.9
              )%




**Fiscal
      Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30,
      2007**





*Revenues.* Revenues
      from school bus operations were $386.3 million for the year ended June 30,
      2008
      compared to $382.0 million for the year ended June 30, 2007, an increase of
      $4.3 million, or 1.1%. This increase was due to $7.0 million
      of price increases, $4.1 million in new contracts and $1.5 million increase
      in
      DOE escort cost reimbursement revenue partially offset
      by a
      reduction of service requirements of $4.6 million, due primarily to one less
      DOE
      revenue day and a
      reduction in DOE routes, a reduction of $0.4 million  in
      summer
      revenues and
      $3.3
      million in lost contracts.





Revenues
      from paratransit and transit operations were $47.2 million for the year ended
      June 30, 2008 compared to $46.8 million for the year ended June 30, 2007, an
      increase of $0.4 million or 0.8%. This increase was primarily due to price
      increases and an increase in charter revenue offset partially by a reduction
      of
      service requirements due to a ten day labor strike that affected our paratransit
      operations in December 2007.


22


*Cost
      of Operations.* Cost of
      operations of school bus operations was $355.7 million for the year ended June
      30, 2008 compared to $338.9 million for the year ended June 30, 2007, an
      increase of $16.8 million or 4.9%. This increase was primarily due to a
      $7.6 million increase in fuel expense, a $7.2 million increase in salaries
      and
      wages and $2.4 million in health and welfare costs primarily under our New
      York
      City labor contract, partially offset by a $1.0 million decrease in vehicle
      insurance expense. Salaries and wages were $192.7 million for the year ended
      June 30, 2008 compared to $185.5 million for the year ended June 30, 2007,
      an
      increase of $7.2 million or 3.9% due to contractual wage increases
      partially offset by fewer routes. As a percentage of revenues, salaries and
      wages increased to 49.9% for the year ended June 30, 2008, from 48.6% for the
      year ended June 30, 2007. As a percentage of revenues, cost of operations
      increased to 92.1% for the year ended June 30, 2008, from 88.7% for the year
      ended June 30, 2007.





Cost
      of
      operations of paratransit and transit operations were $41.9 million for the
      year ended June 30, 2008 compared to $41.6 million for the year ended June
      30,
      2007, an increase of $0.3 million or 0.7%. This increase was primarily due
      to a $0.9 million increase in fuel expense partially offset by a $0.6 million
      decrease in driver wages, due primarily to a decrease in driver overtime and
      a
      ten day labor strike that affected our paratransit operations in December 2007,
      partially offset by an increase in charter revenue. As a percentage of revenues,
      salaries and wages decreased to 49.5% for the year ended June 30, 2008, from
      50.6% for the year ended June 30, 2007. As a percentage of revenues, cost of
      operations were 88.8% for the years ended June 30, 2007 and 2008.





*General
      and administrative expenses.* General
      and administrative expenses from school bus operations were $15.1 million for
      the year ended June 30, 2008 compared to $15.0 million for the year ended June
      30, 2007, an increase of $0.1 million or 0.2%. This increase was primarily
      due
      to increases in bad debt expense and professional fees partially offset by
      a
      decrease in administrative payroll. As a percentage of revenues, general and
      administrative expenses were 3.9% for the years ended June 30, 2007 and
      2008.





General
      and administrative expenses from paratransit and transit operations were $2.7
      million for the year ended June 30, 2008 compared to $2.8 million for the year
      ended June 30, 2007, a decrease of $0.1 million or 3.1%. This decrease was
      primarily due to a decrease in administrative payroll and fringe benefits.
      As a
      percentage of revenues, general and administrative expenses decreased to 5.8%
      from 6.0% for the year ended June 30, 2007.





*Depreciation
      and amortization.* Depreciation and amortization expense from school bus operations was
      $17.6 million for the year ended June 30, 2008 compared to
      $17.7 million for the year ended June 30, 2007, a decrease of
      $0.1 million or 0.5%. This decrease was primarily due to the Company having
      lower depreciation expense for the year ended June 30, 2008 as some of the
      assets are now fully depreciated.





Depreciation
      and amortization expense from paratransit and transit operations was $1.4
      million for the years ended June 30, 2007 and 2008.





*Income
      (loss) from operations.* Loss
      from school bus operations was $2.3 million for the year ended June 30,
      2008 compared to $10.4 million of income from operations for the year ended
      June
      30, 2007, an increase in loss from operations of $12.7 million, due to the
      net effect of the items discussed above.





Income
      from paratransit and transit operations was $1.1 million for the year ended
      June 30, 2008 compared to $1.0 million for the year ended June 30, 2007, an
      increase of $0.2 million, due to the net effect of the items discussed
      above.





*Interest
      expense.*  Interest
      expense was $33.3 million for the year ended June 30, 2008 compared to $34.8
      million for the year ended June 30, 2007, a decrease of $1.4 million, or 4.1%.
      This decrease was primarily due to a $6.2 million reduction of amortization
      of
      deferred financing charges and original issue discount and a $3.5 million
      reduction for a prepayment penalty on the redemption of the Old Notes in fiscal
      year 2007, partially offset by a $6.7 million change in the fair market value
      of
      interest rate swap expense and $1.6 million of other increases in interest
      expense, primarily due to increases in long-term debt.





*Reorganization
      costs.* Reorganization
      costs were $0.1 million for the years ended June 30, 2007 and 2008.




*Loss
      before benefit from income taxes and discontinued operations.* Due to
      the net effect of the items discussed above we experienced a loss before a
      benefit from income taxes and discontinued operations of $34.4 million for
      the year ended June 30, 2008, compared to a loss of $23.0 million for the year
      ended June 30, 2007, an increase in loss of $11.4 million.





*Gain
      from discontinued operations.* We
      experienced a gain from discontinued operations of $5.6 million from the sale
      of
      T-NT Bus Service Inc. for the year ended June 30, 2007. There was no gain or
      loss from discontinued operations for the year ended June 30,
      2008.


23






**Fiscal
      Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30,
      2006**





*Revenues.* Revenues
      from school bus operations were $382.0 million for the year ended June 30,
      2007 compared to $368.1 million for the year ended June 30, 2006, an
      increase of $13.9 million, or 3.8%. This increase was due to $14.1 million
      of price increases and $11.6 million of service requirement increases due
      primarily to five more
      revenue days in NYC which increased revenue by approximately $4.8 million and approximately
      140 new routes in NYC operations that started February 22, 2006 which increased
      revenue by $4.9 million offset
      by
      $10.7 million in sold contracts
      and $1.1 million in lost contracts.





Revenues
      from paratransit and transit operations were $46.8 million for the year ended
      June 30, 2007 compared to $46.0 million for the year ended June 30, 2006,
      an increase of $0.9 million or 1.9% due to price increases and increases in
      service requirements from existing contracts.





*Cost
      of Operations.* Cost of
      operations of school bus operations were $338.9 million for the year ended
      June
      30, 2007 compared to $330.7 million for the year ended June 30, 2006, an
      increase of $8.2 million or 2.5%. As a percentage of revenues, cost of
      operations decreased to 88.7% for the year ended June 30, 2007 from 89.9% for
      the year ended June 30, 2006. Salaries and wages were $185.5 million for the
      year ended June 30, 2007 compared to $181.4 million for the year ended June
      30,
      2006, an increase of $4.1 million or 2.3%. This increase was primarily due
      to more employees needed to service additional routes and an increase in payroll
      days in New York City. As a percentage of revenues, salaries and wages decreased
      to 48.6% for the year ended June 30, 2007 from 49.3% for the year ended June
      30,
      2006. Employee fringe benefits increased by $1.8 million and vehicle lease
      expense increased by $6.2 million as the Company continues to finance its
      vehicle requirements through the use of operating leases. These increases were
      partially offset by a decreases in liquidated damages of $1.4 million, vehicle
      insurance of $1.4 million and $0.9 million in fuel expense.





Cost
      of
      operations of paratransit and transit operations were $41.6 million for the
      year ended June 30, 2007 compared to $39.5 million for the year ended June
      30,
      2006, an increase of $2.1 million or 5.4%. This increase was primarily due
      to an
      increase in salaries and wages, employee fringe benefits and an increase in
      vehicle maintenance costs. As a percentage of revenues, salaries and wages
      increased to 50.7%, for the year ended June 30, 2007 from 50.4% for the year
      ended June 30, 2006. As a percentage of revenues, cost of operations increased
      to 88.8% from 85.9% for the year ended June 30, 2006.





*General
      and administrative expenses.* General
      and administrative expenses from school bus operations were $15.0 million for
      the year ended June 30, 2007 compared to $16.7 million for the year ended June
      30, 2006, a decrease of $1.7 million or 10.0%. This decrease was primarily
      due
      to decreases in administrative payroll including a $0.5 million contract renewal
      bonus paid to certain executives in connection with the extension agreement
      with
      the DOE and
      $0.2
      million in executive severance pay and
      $0.5
      million in costs for establishing vehicle lease financing facilities for the
      year ended June 30, 2006. As a percentage of revenues, general and
      administrative expenses decreased to 3.9% from 4.5% for the year ended and
      June
      30, 2006.





General
      and administrative expenses from paratransit and transit operations were $2.8
      million for the year ended June 30, 2007 compared to $2.3 million for the year
      ended June 30, 2006, an increase of $0.5 million or 20.5%. This increase was
      primarily due to an increase in administrative payroll and fringe benefits.
      As a
      percentage of revenues, general and administrative expenses increased to 6.0%
      from 5.1% for the year ended June 30, 2006.





*Depreciation
      and amortization.* Depreciation and amortization expense from school bus operations was
      $17.7 million for the year ended June 30, 2007 compared to
      $26.6 million for the year ended June 30, 2006, a decrease of
      $8.9 million or 33.5%. This decrease was primarily due to a $5.7 million
      impairment charge on fixed assets for the year ended June 30, 2006 and the
      Company having $3.2 million of lower depreciation expense for the year ended
      June 30, 2007 as some of the assets are now fully depreciated. The Company
      continues to finance its vehicle requirements through the use of operating
      leases.





Depreciation
      and amortization expense from paratransit and transit operations was $1.4
      million for the year ended June 30, 2007 compared to $1.6 million for the year
      ended June 30, 2006, a decrease of $0.2 million or 12.1%.





*Income
      (loss) from operations.* Income
      from school bus operations was $10.4 million for the year ended June 30,
      2007 compared to a $5.9 million loss for the year ended June 30, 2006, an
      increase in income from operations of $16.3 million, due to the net effect
      of the items discussed above.





Income
      from paratransit and transit operations was $0.9 million for the year ended
      June 30, 2007 compared to $2.5 million for the year ended June 30, 2006, a
      decrease of $1.6 million, due to the net effect of the items discussed
      above.


24





*Interest
      expense.* Interest
      expense was $34.8 million for the year ended June 30, 2007 compared to $25.9
      million for the year ended June 30, 2006, an increase of $8.8 million, or
      34.0%. The increase was primarily due to a $2.9 million write-off of deferred
      financing expenses in relation to the redemption of the Old Notes, $3.5 million
      prepayment penalty on the repayment of the Notes, $1.8 million of PIK interest
      and a $0.8 million increase in amortization of the original issue discount
      offset partially by a $0.5 million of interest rate swap income.





*Reorganization
      costs.* Reorganization
      costs were $0.1 million compared to $0.6 million for the year ended June 30,
      2006, a decrease of $0.5 million.




*Loss
      before benefit from income taxes and discontinued operations.* Due to
      the net effect of the items discussed above we experienced a loss before a
      benefit from income taxes and discontinued operations of $23.0 million for
      the year ended June 30, 2007, compared to a loss of $29.5 million for the year
      ended June 30, 2006, a decrease in loss of $6.5 million.





*Gain
      (loss) from discontinued operations.* We
      experienced a gain from discontinued operations of $5.6 million from the sale
      of
      T-NT Bus Service Inc. for the year ended June 30, 2007 compared to a minimal
      loss from discontinued operations for the year ended June 30, 2006.




**Liquidity
      and Capital Resources**





**Liquidity
      and Capital Resources**





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




The
      Company operated a fleet of approximately 5,500 vehicles as of June 30, 2008
      and
      consumes substantial quantities of fuel for its operations. Based on the
      Company’s current operations, an increase in fuel costs of 10 cents per gallon
      will increase its cost of fuel purchased by approximately $0.9 million on an
      annual basis.





Capital
      expenditures for the fiscal years ended June 30, 2007 and June 30, 2008 totaled
      $18.2 million and $10.8 million, respectively. Vehicle capital expenditures
      accounted for $13.7 million (including $12.1 million for the buyout of operating
      leases) and $5.9 million for the fiscal years ended June 30, 2007 and 2008,
      respectively. The Company has met substantially all of its vehicle
      capital expenditures requirements
      by the use of operating leases. The
      Company’s vehicle lease expense was $15.1 million for the fiscal year ended June
      30, 2008 compared to $14.4 million for the fiscal year ended June 30, 2007,
      an
      increase of $0.7 million. The
      Company anticipates capital expenditures of approximately $7 million (including
      approximately $5 million of non-vehicle capital expenditures) for fiscal 2009
      and an increase in vehicle lease expense of approximately $3.3
      million.




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





Effective
      as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
      reduce our exposure to interest rate fluctuations on the notes, which bear
      interest at LIBOR plus a margin of 7.25%. The Swap has a notional amount of
      $185
      million with a fixed rate of 5.21% thereby effectively converting the floating
      rate notes to a fixed rate obligation of 12.46%. The Swap will expire in April
      15, 2010. On the interest payment dates of the notes, the difference between
      LIBOR and 5.21% is required to be settled in cash. In accordance with SFAS
      No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* the Swap
      does not qualify for "Cash Flow Hedge Accounting" treatment since the
      documentation of the accounting treatment was not done contemporaneously with
      entering into the agreement. The reduction in the fair market value of this
      interest swap agreement of approximately $6.2 million is reflected as an
      addition to interest expense for the year ended June 30, 2008.


Our
        obligation under the Swap is secured by the collateral securing our Amended
        and
        Restated Credit Facility and in connection therewith total reserves of
        approximately $6.8 million, $6.7 million, $7.4 million and $7.8 million for
        June
        2008, July 2008, August 2008 and September 2008, respectively, were established
        against our borrowing base. In February 2008, our senior credit facility
        was
        amended to change the calculation of the borrowing base for the purpose of
        the
        calculation of excess availability, solely in relation to testing the EBITDA
        covenant (see Note 7 (b) to Notes to Consolidated Financial Statements included
        elsewhere in this Form 10-K) to exclude the first $5.0 million of reserves
        established in connection with our Swap. This change is effective from January
        1, 2008 until February 15, 2009. Until August 28, 2008, excess availability
        was
        required to be at least $5.0 million at all times during the period from
        July 1
        to August 31 of any year, and $8.0 million for the balance of the fiscal
        year.
        As of August 28, 2008, the senior credit facility was amended to extend the
        period where excess availability required is $5.0 million from August 31
        of any
        year to September 15 of any year. As of September 25, 2008, the senior credit
        facility was further amended such that the excess availability requirement
        is as
        follows: (i) $5,000,000 at all times during the period from July 1, 2008
        to
        September 15, 2008, (ii) $8,000,000 at all times during the period from
        September 16, 2008 to September 30, 2008, (iii) $4,500,000 at all
        times during the period from October 1, 2008 to July 31, 2009, (iv) $4,000,000
        at all times during the period from August 1, 2009 to September 15, 2009,
        (v)
        $4,500,000 at all times during the period from September 16, 2009 to November
        1,
        2009, (vi) $8,000,000 at all times during the period from November 2,
        2009 to June 30, 2010, (vii) $5,000,000 at all times during the period from
        July 1 to September 15 of any year (commencing in 2010), and
        (viii) $8,000,000 at all times during the period from September 16 of any
        year (commencing in 2010) through June 30 of the immediately following year.
        Based upon these amendments, the Company did not need to test the EBITDA
        covenant through September 26, 2008.


25





Concurrently
      with the issuance of the notes, the Company and substantially all of its
      subsidiaries also amended and restated its existing senior credit facility
      with
      Wachovia Bank, National Association (“Wachovia”) as agent, to provide up to
      $35.0 million of borrowing availability under a revolving credit facility,
      subject to customary borrowing conditions, plus a $10.0 million letters of
      credit facility. The Amended and Restated Credit Facility is secured by a first
      priority lien on substantially all of the Company’s and its subsidiaries’
assets, other than collateral securing the Notes on a first priority basis.
      In
      addition, the term of the credit facility was extended from February 29, 2008
      to
      December 31, 2011. The Amended and Restated Credit Facility contains customary
      events of default and contains a minimum last 12 month (“LTM”) EBITDA covenant
      of $26.0 million, which will only be tested if excess availability falls below
      certain levels. The LTM EBITDA was $18.3 million as of June 30, 2008, but was
      not tested because the Company met the availability requirements.





The
      borrowing capacity under the Amended and Restated Credit Facility is based
      upon
      85% of the net amount of eligible accounts receivable less reserves. Our senior
      lender has established borrowing base reserves of approximately $6.8 million,
      $6.7 million, $7.4 million and $7.8 million for June 2008, July 2008, August
      2008 and September 2008, respectively, in connection with our Swap (see Note
      2
      to Notes to Consolidated Financial Statements included elsewhere in this Form
      10-K). Loans under the facility bear interest at the prime rate (the prime
      rate
      at June 30, 2008 was 5%). Letters of credit are subject to a fee of 1% per
      annum
      payable monthly in arrears and any amounts paid by lenders for letters of credit
      will bear the same rate as loans under our revolving facility. The Company
      paid
      a closing fee of $400,000 and is required to pay a servicing fee of $10,000
      per
      month, plus pay a monthly fee of 0.5% on any unused portion of its Amended
      and
      Restated Credit Facility.





In
      December 2007, one of the Company’s insurance carriers issued us approximately
      $9.0 million in credits, representing retrospective adjustments for various
      years, by offsetting approximately $2.2 million of current premiums due in
      January 2008, returning funds of $6.0 million and adding $0.8 million to our
      cash collateral account. In addition, the insurance company did not renew a
      $0.7
      million letter of credit held as collateral. This letter of credit was
      collateralized by restricted cash which became available for working capital.
      The transaction had no effect on the Company’s consolidated statements of
      operations for the year ended June 30, 2008 and has no impact on future
      insurance expense.





Under
      the
      terms of our contract with the DOE (our largest customer) the Company will
      receive a CPI increase of 4% for the fiscal year ending June 30, 2009. However,
      a reduction in the number of routes or a change in the configuration of routes
      for that year may effectively reduce this increase to less.





The
      Company operated a fleet of approximately 5,500 vehicles as of June 30, 2008
      and
      uses substantial quantities of fuel in its operations. The Company’s fuel
      expense for the year ended June 30, 2008 was $30.3 million compared to $21.8
      million for the year ended June 30, 2007, an increase of $8.5 million, or 39.2%.
      Based on the Company’s current operations, an increase in fuel costs of 10 cents
      per gallon will increase its cost of fuel purchased by approximately $0.9
      million on an annual basis. If the cost of fuel continues to increase it will
      have an adverse effect on the Company’s liquidity.





The
      Company, in addition to normal working capital requirements, has significant
      interest obligations and capital expenditure requirements to finance its
      operations. Our senior lender has established borrowing base reserves of
      approximately $6.8 million, $6.7, $7.4 million and $7.8 million for June 2008,
      July 2008, August 2008 and September 2008, respectively, in connection with
      our
      Swap (see Note 2 to Notes to Consolidated Financial Statements included
      elsewhere in this Form 10-K). If these reserves increase they may have a
      significant adverse effect on the Company’s liquidity.





The
      Company believes that borrowings under the Amended and Restated Credit Facility,
      anticipated retrospective insurance credits to be received from its insurance
      company together with its existing cash and cash flow from operations should
      be
      sufficient to fund the Company’s anticipated liquidity requirements for the next
      year. However, significant increases in the cost of fuel or other unforeseen
      increases in expenses could require the Company to pursue additional funding
      alternatives, including the sale of certain assets or operations, in order
      to
      improve its liquidity position.





LTM
      EBITDA was $18.3 million as of June 30, 2008 and we expect LTM EBITDA to be
      below $26.0 million for the next twelve months. If our excess availability
      for
      the purpose of testing the EBITDA covenant (see Notes 2 and 7(b) to Notes to
      Consolidated Financial Statements included elsewhere in this Form 10-K) falls
      below certain levels, this will generate a default under our Amended and
      Restated Credit Facility and under certain circumstances cause a cross default
      under the notes. Although the Company believes that it would be able to receive
      a waiver of this default from Wachovia, there can be no assurance that this
      is
      the case or what the cost to the Company might be. If the Company would not
      be
      able to receive a waiver, then the amount of the Amended and Restated Credit
      Facility would be reclassified to a current liability.


26





As
      of
      June 30, 2008, total current assets were $82.6 million and total current
      liabilities were $30.9 million. At
      June
      30, 2008, the Company’s debt under its $35.0 million Amended and Restated Credit
      Facility was $6.0 million, and it had $13.2 million of borrowing availability
      after $6.8 million of reserves, based on the Company’s borrowing base
      calculations. Approximately
      $9.3 million of the Company’s $10.0 million letter of credit facility was used
      as of the same date. On September 15, 2008, under our Amended and Restated
      Credit Facility the Company had a credit balance of $3.9 million, and it had
      $8.3 million in borrowing availability after $7.8 million of reserves, based
      upon the Company’s borrowing base calculations.




*Net
      cash provided by (used in) operating activities.* Net
      cash provided by operating activities was $4.2 million for the year ended June
      30, 2008, resulting primarily from proceeds of cash due to changes in the
      components of working capital of $9.9 million (primarily decrease in prepaid
      expenses of $6.4 million due to refunds of auto and workers’ compensation
      insurance loss funds) and $27.7 million of non-cash items ($21.1 million of
      depreciation and amortization, $6.3 million interest swap expense and $0.3
      million contract right impairment), partially offset by $33.4 million used
      in
      operating activities.




Net
      cash
      used in operating activities was $12.8 million for the year ended June 30,
      2007,
      resulting primarily from a use of cash due to changes in the components of
      working capital of $15.6 million and $25.8 million used in operating activities,
      partially offset by $28.6 million of non-cash items of depreciation,
      amortization and interest.




*Net
      cash provided by (used in) investing activities.* Net
      cash
      used in investing activities for the year ended June 30, 2008 was $8.7 million
      resulting primarily from $10.8 million of capital expenditures (including,
      $0.2
      million directly financed with purchase money debt and $0.7 million of the
      acquisition cost of vehicles exchanged), less $0.6 million proceeds from sales
      of assets and $0.7 million decrease in restricted cash and cash equivalents.




Net
      cash
      provided by investing activities for the year ended June 30, 2007 was $2.4
      million resulting primarily from $12.5 million of proceeds from the sale of
      assets, $3.1 million decrease in restricted cash and $5.1 million of proceeds
      from sales or redemptions of marketable securities, partially offset by the
      $18.2 million of capital expenditures. Of these, $0.6 million of capital
      expenditures were directly financed with purchase money debt, $12.1 million
      financed from the proceeds from the issuance of the notes and the balance were
      financed from operating cash flows.




*Net
      cash provided by financing activities.* Net
      cash provided by financing activities totalled $0.3 million for the year ended
      June 30, 2008 primarily due to $2.9 million increase in net borrowings under
      our
      Amended and Restated Credit Facility, partially offset by $2.4 million in
      payments on borrowings under capital leases and purchase money mortgages.




Net
      cash
      provided by financing activities totalled $16.8 million for the year ended
      June
      30, 2007 due primarily to $182.2 million in proceeds from the issuance of the
      notes partially offset by repayment of $116.3 million for our Old Notes,
      repayment of $15.5 million for the our previously outstanding third priority
      notes, repayment of $4.9 million for senior unsecured note, repayment of $3.5
      million for the letter of credit advance, $14.7 million decrease in net
      borrowings under our Amended and Restated Credit Facility, $7.8 million in
      new
      deferred financing costs and $2.7 million in payments on borrowings under
      capital leases and purchase money mortgages.




**Commitments
      and Contractual Obligations**





Our
      contractual obligations and commitments principally include obligations
      associated with our outstanding indebtedness and future minimum operating lease
      obligations as set forth in the following table.





The
      following table shows our contractual obligations and commitments as of June
      30,
      2008, and the payments due by period.


27




**Payment
                  due by period****Total**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **2012**
              
              **2013**
              
              **Thereafter**Actual
                  payments:Floating
                  rate senior secured notes
              
              $
              185,000,000
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              185,000,000
              
              $
              —
              
              $
              —Amended
                  and Restated Credit Facility
              
              
              5,952,274
              
              
              —
              
              
              —
              
              
              —
              
              
              5,952,274
              
              $
              —
              
              
              —Long-term
                  debt
              
              
              2,419,856
              
              
              766,232
              
              
              732,446
              
              
              273,095
              
              
              490,665
              
              
              62,570
              
              
              94,848Capital
                  lease obligations
              
              
              1,898,614
              
              
              1,600,811
              
              
              195,825
              
              
              101,978
              
              
              —
              
              
              —
              
              
              —Interest
                  expense
              
              
              95,962,221
              
              
              24,064,500
              
              
              23,995,637
              
              
              23,925,199
              
              
              23,583,931
              
              
              211,325
              
              
              181,629Operating
                  lease obligations—real property
              
              
              40,843,086
              
              
              6,242,760
              
              
              5,285,608
              
              
              4,758,629
              
              
              3,969,808
              
              
              3,731,925
              
              
              16,854,356Operating
                  lease obligations—transportation equipment
              
              
              44,558,482
              
              
              13,772,616
              
              
              11,458,342
              
              
              6,963,012
              
              
              5,285,325
              
              
              3,985,839
              
              
              3,093,348Management
                  fees—related parties
              
              
              2,500,000
              
              
              500,000
              
              
              500,000
              
              
              500,000
              
              
              500,000
              
              
              500,000
              
              
              
              (1)Priority
                  tax claims (2)
              
              
              137,389
              
              
              137,389
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  contractual cash obligations
              
              $
              379,271,922
              
              $
              47,084,308
              
              $
              42,167,858
              
              $
              36,521,913
              
              $
              224,782,003
              
              $
              8,491,659
              
              $
              20,224,181








(1)    The
      management fee to related parties has no expiration date and terminates only
      upon the related party ceasing to own of record any shares of the common stock
      issued to them.





(2)    Priority
      tax claims are claims of state and local governments for unpaid taxes relating
      to the year 2002. In accordance with federal bankruptcy law, these claims
      survived the Company’s chapter 11 proceedings .





AETG
      and
      our Company have entered into employment agreements with Domenic Gatto, our
      Chief Executive Officer and President, whose agreement provides for his
      continued employment with us through December 31, 2009, and Nathan
      Schlenker, our Chief Financial Officer, whose agreement provides for his
      continued employment with us through December 31, 2008. Our total base
      salary contractual obligations under these employment agreements include
      required base salary payments of $ 803,565 ,
      for the
      fiscal year ending June 30, 2009. See "—Executive Compensation” included
      elsewhere in this Form 10-K for more information about the terms of these
      employment agreements.





We
      have
      no off-balance sheet debt or similar obligations.





**Quarterly
      Financial Information**





The
      table
      below sets forth unaudited summary quarterly financial information for the
      Company for the last eight quarters. This information has been prepared by
      the
      Company on a basis consistent with its audited Consolidated Financial Statements
      and includes all adjustments that management considers necessary for a fair
      presentation of the results for such quarters.





**Fiscal year 2007**
            
            **Fiscal year 2008****September 30,**
              **2006**
            
            **December**
              **31, 2006**
            
            **March**
              **31,**
              **2007**
            
            **June**
              **30, 2007**
            
            **September**
              **30, 2007**
            
            **December**
              **31, 2007**
            
            **March**
              **31,**
              **2008**
            
            **June**
              **30, 2008****(Dollars
                in millions)**Revenue
            
            $
            69.8
            
            $
            119.0
            
            $
            122.4
            
            $
            117.6
            
            $
            67.0
            
            $
            119.4
            
            $
            122.0
            
            $
            125.1Income
                (loss) from operations
            
            
            (8.0
            )
            
            7.0
            
            
            6.0
            
            
            6.3
            
            
            (11.2
            )
            
            5.0
            
            
            1.3
            
            
            3.7Net
                income (loss)
            
            
            (8.5
            )
            
            (0.0
            )
            
            (0.7
            )
            
            (7.9
            )
            
            (20.9
            )
            
            (4.7
            )
            
            (10.0
            )
            
            1.2




**Item
      7A.**  ***Quantitative
      and Qualitative Disclosures About Market Risks.***





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





We
      operated a fleet of approximately 5,500 vehicles as of June 30, 2008 and consume
      substantial quantities of fuel for our operations. Based on our current
      operations, an increase in fuel costs of 10 cents per gallon would increase
      our
      cost of fuel purchased by approximately $0.9 million on an annual basis.
      From time to time in the past, we have entered into hedging contracts to protect
      ourselves from fluctuations in the cost of fuel, and we may seek to do the
      same
      in the future. We currently do not have any fuel hedging agreements in place,
      but we continually evaluate entering into such agreements if we believe
      increases in fuel costs are likely. No assurance can be given that we will
      be
      able to adequately protect ourselves from fluctuating fuel costs even if we
      enter into hedging contracts.


28





As
      of
      June 30, 2008, our only variable rate borrowings are the notes (LIBOR plus
      7.25%
      interest) and the Amended and Restated Credit Facility (prime rate). On May
      15,
      2007 we reduced our exposure to interest rate fluctuations on our
      notes by
      entering into the
      Swap.
      The Swap has a notional amount of $185 million with a fixed rate of 5.21%
      thereby effectively converting the floating rate notes to a fixed rate
      obligation of 12.46%. The Swap will expire on April 15, 2010. On the interest
      payment dates of the notes, the difference between LIBOR and 5.21% will be
      settled in cash. As of June 30, 2008 the fair market value of the Swap was
      a
      $5.8 million liability. Our obligation under the Swap is secured by the
      collateral securing our Amended and Restated Credit Facility. As
      of
      June 30 ,
      2008 ,
      based
      upon our variable interest rate borrowings, a 100 basis point increase in
      interest rates, applied to our maximum variable rate borrowings, would have
      no
      material effect on cash flows until periods commencing April 16, 2010.





**Critical
      Accounting Policies**





In
      presenting our consolidated financial statements in conformity with U.S.
      generally accepted accounting principles, we are required to make estimates
      and
      judgments that affect the amounts reported therein. Some of the estimates and
      assumptions we are required to make relate to matters that are inherently
      uncertain as they pertain to future events. We base these estimates on
      historical experience and on various other assumptions that we believe to be
      reasonable and appropriate. Actual results may differ significantly from these
      estimates. The following is a description of our accounting policies that we
      believe require subjective and complex judgments, and could potentially have
      a
      material effect on our reported financial condition or results of operation.





*Property,
      Plant and Equipment.* We
      depreciate our property, plant and equipment over their useful lives, which
      range from 3 to 31.5 years, on a straight-line basis. These useful lives
      are based upon our estimates of the periods that the assets will provide
      economic benefit. Our policy is to review the carrying value of our long-lived
      assets whenever events or changes in circumstances occur that indicate the
      carrying value may not be recoverable. Our definite-life assets will continue
      to
      be depreciated or amortized over their estimated useful lives and are subject
      to
      the impairment criteria as required by SFAS No. 144.





*Transportation
      Contract Rights.* Transportation contract rights primarily represent the value we assigned to
      the
      cost of investments in school bus companies in excess of the book value of
      the
      companies acquired. In addition, we have purchased from unrelated third parties
      certain transportation contract rights with respect to revenue contracts and
      travel routes. Transportation contract rights are assessed for impairment at
      least annually and whenever events or changes in circumstances indicate that
      the
      carrying value may not be recoverable. Important factors that could trigger
      an
      impairment review include significant underperformance relative to historical
      or
      projected future operating results, significant changes in the use of the
      acquired assets or the strategy of the overall business, and significant
      negative industry or economic trends. If indicators of impairment are present,
      management evaluates the carrying value of the intangibles in relation to the
      projection of future undiscounted cash flows of the underlying assets. Projected
      cash flows are based on historical results adjusted to reflect management's
      best
      estimate of future market and operating conditions, which may differ from actual
      cash flow. Transportation contract rights are amortized on a straight-line
      basis
      over 12 years, which represents the Company's estimate of the average length
      of
      the contracts and expected renewal periods. We recorded an impairment charge
      of
      $0.3 million for the year ended June 30, 2008, which is included in
      the school bus operations segment to adjust the transportation contract rights
      to fair value. The requirements for this impairment charge was determined by
      management's evaluation that the future undiscounted cash flows attributable
      to
      the underlying assets were unlikely to exceed the carrying value of the
      transportation contract rights assets for a subsidiary school bus company
      located in New Jersey. The impairment charge was the difference between book
      value of the transportation contract rights and estimated fair value, determined
      by the estimated future cash flows. See Note 2 of Notes to Consolidated
      Financial Statements included elsewhere in this Form 10-K for further
      discussion.





*Income
      Taxes.* We
      follow the liability method under SFAS No. 109, *Accounting
      for Income Taxes* .
      The
      primary objectives of accounting for taxes under SFAS No. 109 are to
      (1) recognize the amount of tax payable for the current year and
      (2) recognize the amount of deferred tax liability or asset for the future
      tax consequences attributable to temporary differences between the financial
      statements' carrying amounts of existing assets and liabilities and their
      respective tax bases and of events that have been reflected in our financial
      statements or tax returns. When the realization of a deferred tax asset is
      not
      considered to be more likely than not, a valuation allowance is recorded against
      that deferred tax asset.





As
      discussed in Note 11 of Notes to Consolidated Financial Statements, we have
      net deferred tax assets resulting primarily from net operating losses ("NOL")
      that would reduce taxable income in future periods. SFAS No. 109 requires
      that a valuation allowance be established when it is "more likely than not"
      that
      all or a portion of net deferred tax assets will not be realized. A review
      of
      all available positive and negative evidence needs to be considered, including
      expected reversals of significant deductible temporary differences, a company's
      recent financial performance, the market environment in which a company
      operates, tax planning strategies and the length of the NOL carry-forward
      period. Management believes that the realization of a portion of the deferred
      tax assets is not considered to be more likely than not and, accordingly, has
      provided a valuation allowance.


29





We
      file
      consolidated federal and state income tax returns with our parent, AETG, and
      its
      affiliates. The income tax charge or benefits allocated to us is based upon
      an
      allocation method determined by the group under its tax sharing agreement.
      The
      balance identified as deferred tax assets and liabilities can, in substance,
      be
      considered the equivalent to amounts due from and due to this affiliated group
      based upon the application of this method.





*Allowance
      for Doubtful Accounts.* We
      maintain an allowance for estimated losses resulting from the inability of
      our
      customers to make required payments. We estimate uncollectible amounts based
      upon historical bad debts, current customer receivable balances, age of customer
      receivable balances, the customer's financial condition and current economic
      trends. If the actual uncollected amounts were to significantly exceed the
      estimated allowance, our results of operations would be materially adversely
      affected.





*Revenue
      Recognition.* Revenues
      from school bus and paratransit and transit operations are recognized when
      services are provided. We bill our customers on a monthly basis based upon
      the
      completion of bus routes and service hours completed to all paratransit
      customers, which in most cases are based upon contracts or extension agreements
      we have with our customers.





*Insurance
      Coverage and Reserves.*  Approximately
      50% of the Company’s primary automobile coverage ($1 million per occurrence) and
      all of the Company’s workers’ compensation insurance coverage (except for one
      subsidiary which has “First Dollar” coverage) is administered through a
      third-party insurance company. The Company funds, through monthly installments,
      loss funds specified by the insurance company, plus fronting charges. These
      loss
      funds are used to pay up to the first $500,000 of each loss. Operating costs
      are
      charged and prepaid assets are reduced by estimated claim losses and fronting
      charges. The charges are based upon estimated ultimate liability related to
      these claims and differ from period to period due to claim payments, and
      settlement practices as well as changes in development factors due to the
      assumed future cost increases and discount rates. On a quarterly basis, the
      Company receives from the insurance company estimates of selected ultimate
      losses that are based on actuarial analysis. Charges to operations are then
      adjusted to reflect these calculations.





For
      the
      years ended June 30, 2006 2007 and 2008, the Company recorded adjustments
      related to expenses (income) changes in prior years claims estimates to its
      insurance expense as follows:





**Year
                Ended**
            
            **Workers**
              **Compensation**
            
            **Automobile**
              **Liability**June
                30, 2006
            
            $
            (1,263,490
            )
            $
            1,017,515June
                30, 2007
            
            
            278,909
            
            
            (522,204
            )June
                30, 2008
            
            
            442,152
            
            
            (447,810
            )




Prior
      to
      the year ended June 30, 2002, the Company self insured its deductibles and
      recorded reserves for these deductibles based upon estimated ultimate claim
      losses, including those incurred but not reported. Reserve requirements at
      June
      30, 2008 in relation to these deductibles were $0.8 million.




**Interest
      Rate Swap**





Effective
      as of May 15, 2007, we entered into the Swap to reduce our exposure to interest
      rate fluctuations on our notes, which bear interest at LIBOR plus a margin
      of
      7.25%. The Swap has a notional amount of $185 million with a fixed rate of
      5.21%
      thereby effectively converting the floating rate notes to a fixed rate
      obligation of 12.46%. The Swap will expire on April 15, 2010. On the interest
      payment dates of the notes, the difference between LIBOR and 5.21% will be
      settled in cash. In accordance with SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* the Swap
      does not qualify for "Cash Flow Hedge Accounting" treatment since the
      documentation of the accounting treatment was not done contemporaneously with
      entering into the agreement. The change in the fair market value of the Swap
      of
      $(461,786) is reflected as a reduction of interest expense and $6,247,854 is
      reflected as an increase of interest expense at June 30, 2007 and 2008,
      respectively.


30





**Recent
      Accounting Pronouncements**





In
      June
      2006, the FASB issued Interpretation 48, “ *Accounting
      for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.
      109* ”
(“FIN
      48”). FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 was effective for the fiscal year
      ended June 30, 2008 year for positions for which it is reasonably possible
      that
      the total amounts of unrecognized tax benefits will significantly increase
      or
      decrease within 12 months of the reporting date. The Company has assessed the
      impact of FIN 48 and it did not have a material effect on its consolidated
      financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. This
      statement is effective for us for the fiscal year beginning July 1, 2008.
      We currently believe that adoption of SFAS No. 157 will not have a material
      impact on our financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 gives us the irrevocable option to carry many financial assets and
      liabilities at fair values, with changes in fair value recognized in earnings.
      This statement is effective for us for the fiscal year beginning July 1,
      2008. We currently believe that adoption of SFAS No. 159 will not have a
      material impact on our financial statements.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
      2007), *Business
      Combinations* ,
      which
      replaces SFAS No. 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized in the purchase accounting. It also
      changes the recognition of assets acquired and liabilities assumed arising
      from
      contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for us beginning July 1,
      2009 and will apply prospectively to business combinations completed on or
      after
      that date.





In
      March
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133,* which
      requires additional disclosures about the objectives of the derivative
      instruments and hedging activities, the method of accounting for such
      instruments under SFAS No. 133 and its related interpretations, and a
      tabular disclosure of the effects of such instruments and related hedged items
      on our financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for us beginning January 1, 2009. We are
      currently assessing the potential impact that adoption of SFAS No. 161 may
      have on our financial statements.





**Item
      8. Financial Statements and Supplementary Data.**





See
      Index
      to Consolidated Financial Statements, which appears on page F-1
      herein





**Item
      9. Changes in Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None.





**Item
      9A(T). Controls and Procedures.**




**Evaluation
      of the Company’s Disclosure Controls and Procedures**





As
      of the
      end of the period covered by this Annual Report on Form 10-K, we carried out
      an
      evaluation under the supervision and with the participation of our management,
      including the Chief Executive Officer and the Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures as defined in Exchange Act Rules 13a-15(e) and
      15d-15(e).  Disclosure controls and procedures are designed to ensure
      that information required to be disclosed in our reports filed under the
      Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and that such information is accumulated and communicated to our
      management, including the Chief Executive Officer and Chief Financial Officer,
      to allow timely decisions regarding required disclosure.  Based on
      this evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that the design and operation of our disclosure controls and
      procedures were effective as of June 30, 2008.


31





**Management’s
      Annual Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as defined in Exchange Act Rules 13a-15(f)
      and
      15d-15(f).  Our internal control over financial reporting is a process
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with generally accepted accounting principles.  Because of
      its inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements.  Also, projections of any evaluation
      of effectiveness to future periods are subject to the risk that controls may
      become inadequate because of changes in conditions, or that the degree of
      compliance with the policies or procedures may deteriorate.  Under the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we conducted an evaluation of
      the
      effectiveness of our internal control over financial reporting as of June 30,
      2008 based on the criteria established in *Internal Control — Integrated Framework* and
      additional guidance provided by *Internal Control over Financial Reporting – Guidance for Smaller Public
      Companies* as
      issued by the Committee of Sponsoring Organizations of the Treadway Commission.
      Based on the results of this evaluation, we concluded that our internal control
      over financial reporting was effective as of June 30 2008. The Company continues
      to review its internal control over financial reporting in order to improve
      its
      effectiveness.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this annual report.





**Changes
      in Internal Control over Financial Reporting**





The
      Company has engaged a consultant in connection with the process of becoming
      compliant under Sarbanes-Oxley section 404 (“SOX”), however there were no
      changes in our internal controls over financial reporting, identified in
      connection with the evaluation of such internal control that occurred during
      our
      last fiscal quarter, that have materially affected, or are reasonably likely
      to
      materially affect, our internal controls over financial reporting.





**Item
      9B. Other Information.**





Not
      Applicable.


32





**PART
      III**




**Item
      10. Directors, Executive Officers and Corporate
      Governance.**





The
      following table sets forth certain information concerning the members of our
      board of directors and our executive officers as of June 30, 2008.




**Name**
            
            **Age**
            
            **Position**Domenic
                Gatto
            
            59
            
            Director,
                Chief Executive Officer and PresidentNathan
                Schlenker
            
            69
            
            Chief
                Financial OfficerJerome
                Dente
            
            62
            
            Chief
                Operating Officer, Secretary and TreasurerNoel
                Cabrera
            
            48
            
            Executive
                Vice PresidentPeter
                Frank
            
            60
            
            Chairman
                of the BoardMatthew
                Kaufman
            
            37
            
            DirectorAdam
                Draizin
            
            38
            
            Director





*Domenic
      Gatto, Director, Chief Executive Officer and President.* Mr. Gatto has served as Director, Chief Executive Officer and President
      since our formation, and has held such positions at AETG since its formation.
      Mr. Gatto, a Vietnam veteran, began his career in the school bus business
      as a bus driver and has been responsible for the development of all facets
      of
      our business.





*Nathan
      Schlenker, Chief Financial Officer.* Mr.
      Schlenker has been with the Company and its predecessor since 1990. During
      that
      period he has served as Executive Vice President, Secretary, Treasurer, Director
      of Finance and Chief Financial Officer. He was the Chief Financial Officer
      of
      the Company since its formation until 2004, at which point he assumed the duties
      of Director of Finance. He also served as Executive Vice President, Secretary
      and Treasurer of the Company and AETG from 1998 to 2004. In April 2006 he
      reassumed the duties of Chief Financial Officer.





*Jerome
      Dente, Chief Operating Officer, Secretary and Treasurer.* Mr. Dente has served as Chief Operating Officer since December 1997
      and was director of New York School Bus Operations from 1994 through 1997.
      Mr. Dente was elected to serve as Secretary and Treasurer of our Company
      and AETG in January 2002.





*Noel
      Cabrera, Executive Vice President.* Mr. Cabrera has served as Executive Vice President since our formation, and
      has served as Executive Vice President of AETG since 1996.





*Peter
      Frank, Chairman of the Board.* Mr. Frank was appointed Chairman of the Board in December 2003 upon
      the effectiveness of our plan of reorganization. He served as our Chief
      Restructuring Officer from July 2002 to December 2003. Prior to his
      employment with our company, Mr. Frank operated, purchased and sold
      businesses for over 25 years. Prior to that, he was an investment banker at
      Goldman, Sachs & Co. Mr. Frank is a director and Chairman of the
      Board of Worldtex, Inc. and Scovill Fasteners, Inc. (both of which are
      majority owned by GSC) and a director of Northstar Travel Media LLC and K-R
      Automation Corp. He received an MBA from Harvard University and a BSEE from
      the
      University of Michigan.





*Matthew
      Kaufman, Director.* Mr. Kaufman has served as a Director since December 2003.
      Mr. Kaufman joined GSCP (NJ), Inc. in 1997, where he is currently a
      Managing Director. He was previously Director of Corporate Finance with NextWave
      Telecom, Inc. Prior to that, he was with The Blackstone Group, in the
      Merchant Banking and Mergers & Acquisitions departments. He is Chairman
      of the Board of Pacific Aerospace & Electronics, Inc. and a
      director of Burke Industries, Inc., Day International Group, Inc.,
      e-talk Corporation, Safety-Kleen Corp., Waddington North America, Inc. and
      Worldtex, Inc. (all of which are majority owned by GSC, except Safety-Kleen
      Corp.). Mr. Kaufman received a B.B.A. and MACC from the University of
      Michigan.





*Adam
      R. Draizin, Director.* Mr. Draizin has served as a Director since August 2004.
      Mr. Draizin is a Principal at American Traffic Solutions serving as
      Executive Vice President and Chief Financial Officer. Prior to American Traffic
      Solutions, he served as a Senior Advisor to the President to British Petroleum’s
      US Fuels on a strategy consulting project. Mr. Draizin was Chief Executive
      Officer of RAD Energy Corp., a New York based oil distributor with approximately
      $350 million in revenue. In January 2001, Mr. Draizin oversaw RAD's
      successful private sale to Sprague Energy. Mr. Draizin served on the Board
      of the Society of Independent Gasoline Marketers of America and worked as an
      investment-banking analyst at Kidder, Peabody & Company.
      Mr. Draizin holds an MBA from the Harvard Business School and a BA from
      Washington University.





There
      are
      no family relationships between any of the aforementioned persons.


33





**Board
      of Directors**





Currently,
      our board of directors consists of four directors, Messrs. Gatto, Frank,
      Kaufman and Draizin.





Our
      board
      of directors consists of the same directors who sit on AETG's board of
      directors. Pursuant to a stockholders agreement for AETG, as more fully
      described under "Certain Relationships and Related Transactions-Stockholders
      Agreement," GSC is entitled to designate a majority of AETG's directors and
      the
      Chief Executive Officer of AETG is to be appointed as a director of AETG. Our
      directors serve for indefinite terms until their successors are qualified and
      elected.





Because
      we do not have any securities listed on a national securities exchange, we
      are
      eligible for exemptions from provisions of the Exchange Act requiring
      independent directors, certain independent board committees and written charters
      addressing certain corporate governance matters. We have elected to take
      advantage of these exemptions and did not establish an independent audit
      committee. We believe that the size of our company does not warrant the need
      to
      recruit and retain independent directors solely for the purpose of establishing
      an independent audit committee.





**Board
      Committees**





We
      established an audit committee at the first meeting of our board of directors
      following the registration statement for the exchange offer on the notes.
      However, as discussed immediately above, our audit committee does not consist
      of
      independent directors.





The
      audit
      committee which consists of two of our current directors (Messrs. Gatto and
      Frank), reviews and reports to the board of directors the scope and results
      of
      audits by our outside auditor and our internal auditing staff and reviews with
      the outside auditors the adequacy of our system of internal controls. It reviews
      transactions between our directors and officers and our Company. The audit
      committee also recommends to the board of directors a firm of registered public
      accountants to serve as our outside auditors for each fiscal year, review the
      audit and other professional services rendered by the outside auditor and
      periodically review the independence of the outside auditor. While we do not
      currently have a director who would meet the qualification of an "audit
      committee financial expert" as defined in Item 401(k) to
      Regulation S-K, we believe that each of our current directors are
      financially literate. Because we do not have any securities listed on a national
      securities exchange, we are eligible for exemptions from provisions of the
      Exchange Act requiring an audit committee financial expert. We have elected
      to
      take advantage of these exemptions. We believe that our two current directors,
      who make up our audit committee, collectively possess the knowledge and
      experience needed to carry out the duties of the audit committee.





**Code
      of Ethics**





We
      have
      not adopted a code of ethics for our principal executive officer and senior
      financial officer. Because
      we do not have any securities listed on a national securities exchange, we
      are
      not required to have a code of ethics.  Furthermore, we believe that a
      written code of ethics is not necessary at this time because we believe our
      executives adhere to and follow ethical standards without the necessity of
      a
      written policy and because 89.8% of our outstanding shares are owned by AETG,
      members of our board are kept abreast of the activities of our executive
      officers.




**Item
      11. Executive Compensation.**





**Compensation
      Discussion and Analysis**





Base
      Salary





Base
      salary is intended to reward the executive for his core competence and for
      services rendered by the executive. Base salaries are established based upon
      on
      the scope of the executive’s responsibilities and his relevant experience,
      taking into account, where available competitive market compensation paid by
      other companies in our industry for similar positions. However, the Company
      does
      not benchmark in establishing total compensation or material elements of total
      compensation such as base salary. Raises
      for executives, with the exception of
      Messrs. Gatto and Schlenker ,
      are
      determined by the CEO taking into consideration the overall performance of
      duties by the executives including efforts and time expended in performance
      of
      these duties plus cost of living increases based upon the Consumer Price Index
      (the “CPI”) for the region in which the executive operates. Raises for Messrs.
      Gatto and Schlenker are
      contractually related to the CPI as more fully described under “ — Employment
      Agreements.”


34





In
      addition all executives and any other employees who do not qualify to
      participate in the Company’s 401(k) plan ( generally highly compensated
      employees), receive, as additional base salary, 7 1⁄2% of their annual salary (as
      reflected on their prior year W-2 form).





Annual
      Incentive Awards





With
      the
      exception of Messrs. Gatto and Schlenker, annual incentive awards are determined
      by the CEO
      and are discretionary in nature and absent of any pre-determined performance
      objectives.





As
      more
      fully described under “ — Employment
      Agreements.” the
      annual cash incentive bonus for Messrs. Gatto and Schlenker is determined by
      the
      Company exceeding adjusted EBITDA projections established by management and
      accepted by the Board of Directors. Under the employment agreements, EBITDA is
      determined from the Company’s consolidated statement of operations. Adjusted
      EBITDA is determined by subtracting from EBITDA excess capital expenditures
      determined from the Company’s consolidated statement of cash flow in excess of
      projected capital expenditures determined by management and accepted by the
      Board of Directors. Prior to the commencement of the fiscal years June
      30, 2008
      and
      2009, Messrs.
      Gatto and Schlenker have waived this incentive bonus for the fiscal year ended
      June 30, 2008 and for the fiscal year ending June 30, 2009.




Change
      in
      Control and Termination Benefits





For
      payments due to our executive officers upon a change of control or upon
      termination, please see “Payments Upon Change of Control or Upon Termination”
below. The payments upon a change of control are intended to align the financial
      interests of our executive officers with those of our shareholders. In addition,
      the change of control benefits and the termination benefits also are intended
      to
      reward our executive officers for the years of dedicated service of such
      executive officers.





Benefits
      and Perquisites





We
      provide executive officers with benefits and perquisites that we believe are
      reasonable and consistent with those offered by other companies in our industry
      with whom we compete for experienced management personnel. For more information
      regarding benefits and perquisites for our executive officers, see “Summary
      Compensation Table” and the footnotes thereto.





**Employment
      Agreements**





Domenic
      Gatto





AETG
      and
      the Company have entered into an amended and restated employment agreement,
      dated as of April 18, 2007, with Domenic Gatto that provides for his continued
      employment with the Company through December 31, 2009. The term of
      Mr. Gatto’s employment may be extended each year for a period of one year
      at the option of the Company. Mr. Gatto was appointed Chief Executive
      Officer, President and Vice Chairman of the Board under the employment
      agreement. Under the terms of the employment agreement, Mr. Gatto receives
      annual compensation in the amount of $609,927 base salary, which will be
      increased on November 1, 2008 and each anniversary date thereafter, by the
      greater of 3% or the last 12 months’ increase in the consumer price index.
      Mr. Gatto is entitled to receive an annual bonus equal to 15% of his base
      salary for each fiscal year in which the Company’s actual adjusted EBITDA
      exceeds by 10% the projected EBITDA. The annual bonus is increased to 25% of
      his
      base salary for each year in which the actual adjusted EBITDA exceeds the
      projected EBITDA by 15%.  Prior
      to
      the commencement of the fiscal years 2008 and 2009, Mr.
      Gatto
      waived this incentive bonus for the fiscal year ended June 30, 2008 and for
      the
      fiscal year ending June 30, 2009. In the
      event of a specified change of control of AETG or the Company, Mr. Gatto
      will receive a cash exit bonus equal to 1.5% of the fair market value of the
      Company’s common shares on a fully diluted basis as of the date of such change
      of control. If the fair market value of all of the outstanding common stock
      is
      equal to or in excess of $50.0 million or $70.0 million, he is entitled to
      receive a bonus equal to 2.5% or 3.0% of the fair market value of the Company’s
      common stock, respectively.





If
      Mr. Gatto is terminated with cause, as defined in his employment agreement,
      he will receive (i) his accrued but unpaid annual bonus, (ii) his cash exit
      bonus upon a change of control; and (iii) provided that executive is not
      terminated for being disloyal by assisting a competitor of AETG or the Company,
      severance equal to six months of his base salary, payable in a lump sum. In
      addition, if Mr. Gatto is terminated due to his death, he also will receive
      (i)
      a pro-rata share of his accrued annual bonus through the date of termination
      and
      (ii) severance in an additional amount equal to six months of his base salary,
      payable in a lump sum. If Mr. Gatto is terminated due to his permanent
      disability, he also will receive for a period of 12 months (i) benefits provided
      to other senior executives (including health insurance), (ii) disability
      insurance, (iii) automobile allowance of $2,150 per month, (iv) life insurance
      premium allowance of $35,000 per year and (v) continued use of a company car
      and
      driver. If Mr. Gatto is terminated without cause, as defined in his
      employment agreement, or by Mr. Gatto for good reason, as defined in his
      employment agreement, or if the Company elects not to extend the term of his
      employment, he also will receive the remainder of his salary and the perquisites
      described in the preceding sentence for the outstanding term of his contract.
      If
      Mr. Gatto terminates his employment without good reason, he will receive (i)
      his
      accrued but unpaid annual bonus and (ii) his cash exit bonus upon a change
      of
      control. The receipt of severance upon termination of Mr. Gatto’s employment is
      contingent upon his delivery of a release in favor of AETG and the
      Company.


35





The
      agreement also contains covenants governing confidentiality, non-competition
      and
      non-solicitation upon the termination of his employment. The non-compete
      continues for a period of 18 months (24 months if a majority of the
      common shares of AETG is then owned by the current shareholders) following
      termination of Mr. Gatto’s employment by AETG and the Company.





Nathan
      Schlenker





AETG
      and
      the Company have entered into an amended and restated employment agreement,
      dated as of April 18, 2007, with Nathan Schlenker, which provides for his
      continued employment with the Company through December 31, 2008. The term of
      Mr. Schlenker’s employment may be extended each year for a period of one
      year at the option of the Company. The agreement covers Mr. Schlenker’s
      employment as our Chief Financial Officer. Mr. Schlenker receives an annual
      compensation of $359,285, which will be increased on November 1, 2008 and
      each anniversary date thereafter by the greater of 3% or the last 12 months’
increase in the consumer price index. Mr. Schlenker is entitled to receive
      an annual bonus equal to 15% of his base salary for each fiscal year in which
      the Company’s actual adjusted EBITDA exceeds by 10% the projected EBITDA. The
      annual bonus is increased to 25% of his base salary for each year in which
      the
      actual adjusted EBITDA exceeds the projected EBITDA by 15%. Prior to the
      commencement of the fiscal years 2008 and 2009, Mr.
      Schlenker waived this incentive bonus for the fiscal year ended June 30, 2008
      and for the fiscal year ending June 30, 2009. In
      the
      event of a specified change of control of the Company or AETG,
      Mr. Schlenker will receive a cash exit bonus equal to 0.5% of the fair
      market value of the Company’s common shares on a fully diluted basis as of the
      date of such change of control. If the fair market value of all of the
      outstanding common stock is equal to or in excess of $50.0 million or $70.0
      million, he is entitled to receive a bonus equal to 1.0 or 1.5% of the fair
      market value of the Company’s common stock, respectively.





Upon
      termination of Mr. Schlenker’s employment for any reason, he will receive health
      insurance coverage for a period of 18 months and his cash exit bonus upon a
      change of control. In addition, if Mr. Schlenker’s employment is terminated
      for any reason other than for cause, as defined in his employment agreement,
      due
      to death or permanent disability or by Mr. Schlenker without good reason,
      as defined in his employment agreement, he will receive severance equal to
      six
      months of his base salary. The receipt of severance upon termination of Mr.
      Schlenker’s employment is contingent upon his delivery of a release in favor of
      AETG and the Company. In addition, upon termination of Mr. Schlenker’s
      employment for any reason other than for cause for good reason, the Company
      will
      retain Mr. Schlenker as a consultant for a period of six months and will
      pay him his base salary for such six month period.





The
      employment agreement also contains covenants governing confidentiality,
      non-competition and non-solicitation upon termination of Mr. Schlenker’s
      employment. The non-compete continues for a period of 18 months (24 months
      if a
      majority of the common shares of AETG is then owned by the current shareholders)
      following termination of Mr. Schlenker’s employment by AETG and the
      Company.





**Payments
      Upon Change of Control or Upon Termination**





As
      more
      fully described under “ — Employment
      Agreements.” Messrs.
      Gatto and Schlenker are entitled to payments upon a change of control and upon
      termination of their employment, however based on the
      fair market value of the Company’s common shares on a fully diluted basis as
      of June 30,
      2008 there would be no compensation that would be due to Messrs. Gatto and
      Schlenker in the event there was a change in control as of June 30,
      2008.





The
      following table sets forth compensation information for our Chief Executive
      Officer and the three most highly compensated named executive officers under
      "—Directors and Executive Officers."




36





**Summary
      Compensation Table**


**Annual Compensation****Name and Principal Position**
                
                **Fiscal Year**
                
                **Salary ($)**
                
                **Bonus ($)**
                
                **Other Annual**
                  **Compensation**
                  **($)**
                
                **All Other**
                  **Compensation**
                  **($)**
                
                **Total Co****mpensation**
                  **($)**Domenic
                    Gatto
                  Chief
                    Executive Officer and President
                
                2008
                  2007
                  2006
                
                664,402
                  677,897
                  673,694
                
                —
                  —
                  500,000
                
                60,800
                  60,800
                  60,800
                (1)
                  (1)
                  (1)
                77,791
                  —
                  50,000
                (3)
                  
                  (2)
                802,993
                  738,697
                  1,234,494Nathan
                    Schlenker
                  Chief
                    Financial Officer(5)
                
                2008
                  2007
                  2006
                
                402,002
                  387,788
                  363,825
                
                18,000
                  18,000
                  57,500
                
                3,000
                  3,000
                  3,000
                (4)
                  (4)
                  (4)
                —
                  —
                  —
                
                423,002
                  408,788
                  424,325Jerome
                    Dente
                  Chief
                    Operating Officer, Secretary and Treasurer
                
                2008
                  2007
                  2006
                
                166,840
                  175,602
                  186,106
                
                71,887
                  48,119
                  16,060
                
                9,900
                  9,900
                  9,900
                (4)
                  (4)
                  (4)
                —
                  —
                  —
                
                248,627
                  233,621
                  212,066Noel
                    Cabrera
                  Executive
                    Vice President
                
                2008
                  2007
                  2006
                
                161,824
                  164,146
                  156,818
                
                34,167
                  40,833
                  27,000
                
                9,900
                  9,900
                  9,900
                (4)
                  (4)
                  (4)
                —
                  —
                  —
                
                205,890
                  214,879
                  193,718


(1)
            Includes
                $25,800 for automobile allowance and $35,000 for life insurance allowance.





(2)
            This
                represents a payment of $50,000 in connection with Mr. Gatto
                providing a personal guarantee, as required by Wachovia, to support
                our
                Amended Receivable Agreement in fiscal year
                2005.




(3)
            This
                represents a payment of $77,791 in connection with Mr. Gatto
                providing a personal guarantee, as required by a surety company,
                to
                support required surety bonds for a school district in fiscal year
                2008.





(4)
            Represents
                automobile allowance





(5)
            Mr. Schlenker
                served as our Chief Financial Officer for most of the time from 1990
                through May 2004. He then served as Director of Finance and in April
                2006 resumed the duties of Chief Financial Officer.





**FISCAL
      2008 DIRECTOR COMPENSATION**





The
      following table shows compensation paid to all directors who are not also
      employees during the fiscal year ended June 30, 2008.




Name
            
            Fees
                Earned
              or
                Paid in
              Cash
                ($)
            
            TotalAdam
                Draizin (1)
            
            
            15,000
            
            
            15,000Peter
                Frank
            
            
            —
            
            
            —Mathew Kaufman
            
            
            —
            
            
            —





(1)
            Mr.
                Draizin receives $5,000 as compensation for every Board of Directors
                meeting he attends.





**Compensation
      Committee Report**





We
      have
      not established a compensation committee or other board committee performing
      the
      equivalent function. As a result, our Board of Directors reviewed and discussed
      the “Compensation Discussion and Analysis” section with management, and has
      approved the inclusion of the “Compensation Discussion and Analysis” in this
      Annual Report on Form 10-K.





Members
      of the Board of Directors





Peter
      Frank


Domenic
      Gatto


Matthew
      Kaufman


Adam
      Draizin


37







**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**




The
      following table sets forth information with respect to the beneficial ownership
      of the common shares of the Company as of September 26, 2008, held
      by:




•
            each
                person whom we know to beneficially own more than five percent of
                our
                outstanding common shares;




•
            each
                of our directors;




•
            our
                Chief Executive Officer and the other executive officers listed in
                the
                Summary Compensation Table under ‘‘Executive Compensation—Summary
                Compensation Table’’; and




•
            all
                our directors and executive officers as a
                group.




The
      persons or entities listed below have sole voting and investment power with
      respect to the shares beneficially owned by them. Except as noted, the address
      for all persons listed below is: c/o Atlantic Express Transportation
      Group, Inc., 7 North Street, Staten Island, NY 10302-1205.




**Common Shares of AETC Beneficially Owned****Name and Address**
            
            **Beneficial Amount**
              **of Ownership**
            
            **Percentage of**
              **Outstanding**
              **Class****(1)**Domenic Gatto
            
            
            —
            
            
            —Nathan
                Schlenker
            
            
            —
            
            
            —Jerome
                Dente
            
            
            —
            
            
            —Noel
                Cabrera
            
            
            —
            
            
            —Peter
                Frank
            
            
            —
            
            
            —Matthew
                Kaufman
            
            
            —
            
            
            —c/o
                GSC Group
              12
                East 49th Street, Suite 3200
              New
                York, NY 10017Adam
                Draizin
            
            
            —
            
            
            —Atlantic
                Express Transportation Group Inc.
            
            
            945,263
            
            
            89.8
            %Goldman
                Sachs
            
            
            83,257
            
            
            7.9
            %40
                Hudson Street, 6th Floor
              Jersey
                City, NJ 07302All
                our directors and executive officers as a group
                (6 persons)
            
            
            —
            
            
            —





(1)  As
      of
      September 26, 2008, we had 1,052,655 common shares outstanding.


38




The
      following table sets forth information with respect to the beneficial ownership
      of the common shares of AETG as of September 26, 2008, held by:




•
            each
                person whom we know to beneficially own more than five percent of
                the
                outstanding common shares of AETG;




•
            each
                director of AETG;




•
            AETG’s
                Chief Executive Officer and the other executive officers listed in
                the
                Summary Compensation Table under ‘‘Executive Compensation—Summary
                Compensation Table’’; and




•
            all
                directors and executive officers of AETG as a
                group.




Our
      board
      of directors consists of the same members as AETG’s board of directors. The
      persons or entities listed below have sole voting and investment power with
      respect to the shares beneficially owned by them. Except as noted, the address
      for all persons listed below is: c/o Atlantic Express Transportation
      Group, Inc., 7 North Street, Staten Island, NY 10302-1205.




**Common Shares of AETG Beneficially Owned****Name and Address**
            
            **Beneficial Amount**
              **of Ownership**
            
            **Percentage of**
              **Outstanding**
              **Class****(1)**Domenic Gatto
            
            
            —
            
            
            —Nathan
                Schlenker
            
            
            —
            
            
            —Jerome
                Dente
            
            
            —
            
            
            —Noel
                Cabrera
            
            
            —
            
            
            —Peter
                Frank
            
            
            —
            
            
            —Matthew
                Kaufman
            
            
            —
            
            
            —c/o
                GSC Group
              12
                East 49th Street, Suite 3200
              New
                York, NY 10017Adam
                Draizin
            
            
            —
            
            
            —GSC
                Group(2)
            
            
            107,593
            
            
            83.9
            %c/o
                GSC Group
              12
                East 49th Street, Suite 3200
              New
                York, NY 10017Hare
                & Co(3).
            
            
            16,397
            
            
            12.8
            %c/o
                The Bank of New York
              PO
                Box 11203
              New
                York, NY 10286All
                directors and executive officers of AETG as a group
                (6 persons)
            
            
            —
            
            
            —







(1)
            As
                of September 26, 2008, AETG had 128,240 common shares
                outstanding.




(2)
            GSCP
                II Holdings (AE), L.L.C. owns 83,776 common shares of AETG, GSC Recovery
                II, L.P. owns 18,133 shares and GSC Partners CDO Fund, Limited owns
                5,684
                shares.




(3)
            In
                addition, Hare & Co is the holder of 16,000 common shares of the
                Company.




39




All
      of
      the membership interests of GSCP II Holdings (AE), L.L.C. are owned by Greenwich
      Street Capital Partners II, L.P., Greenwich Fund, L.P., Greenwich Street
      Employees Fund, L.P., TRV Executive Fund, L.P. and GSCP Offshore Fund, L.P.
      (collectively, the ‘‘Greenwich Street Funds’’).




Greenwich
      Street Investments II, L.L.C. is the general partner and GSCP (NJ), L.P. is
      the
      manager of the Greenwich Street Funds.




GSC
      Recovery II GP, L.P. is the general partner of GSC Recovery II, L.P.
      GSC RII, L.L.C. is the managing member of GSC Recovery II GP, L.P. GSCP
      (NJ) Holdings, L.P. is the general partner of GSC RII, L.L.C.




GSCP
      (NJ), L.P. is the collateral manager of the GSC Partners CDO Fund,
      Limited.




GSCP
      (NJ), Inc. is the general partner of GSCP (NJ), L.P. and GSCP (NJ) Holdings,
      L.P. GSCP (NJ), Inc. is wholly owned by GSC Group, Inc., a Delaware corporation
      which also owns substantially all of GSCP (NJ), L.P. and GSCP (NJ), Holdings,
      L.P. Alfred C. Eckert III, Richard M. Hayden, Robert F. Cummings, Jr., David
      L.
      Goret, Robert A. Hamwee, Joseph H. Wender and Andrew J. Wagner are the executive
      officers of each of GSC Group, Inc. and GSCP (NJ), Inc.




By
      virtue
      of each of the above entities’ and individuals’ relationship with GSCP II
      Holdings (AE), L.L.C., GSC Recovery II, L.P. and GSC Partners CDO Fund, Limited,
      each may be deemed to have shared voting and investment power over, and be
      the
      indirect beneficial owner of the common shares of AETG owned by GSCP II Holdings
      (AE), L.L.C., GSC Recovery II, L.P. and GSC Partners CDO Fund, Limited. Each
      of
      the above entities and individuals disclaims beneficial ownership of AETG’s
      common shares except to the extent of each entity’s and individual’s pecuniary
      interest in AETG’s common shares.




Each
      of
      these entities has an address c/o GSC Group, 12 East 49th Street, Suite 3200,
      New York, NY 10017.





**Item
      13. Certain Relationships and Related Transactions.**





**Receivables
      Purchase Agreement Guarantee**





On
      November 2, 2005 the Company entered into the Amended Receivable Agreement
      to
      sell to Wachovia, without recourse, up to a maximum $8.2 million (previously
      $5.9 million) of accounts receivable. Domenic Gatto increased his existing
      personal guarantee in full support of the amended receivable agreement and
      received an additional $50,000 guarantee fee. The amended receivable agreement
      terminated on
      May
      15, 2007, when the Company and substantially all of its subsidiaries amended
      and
      restated its existing senior credit facility with Wachovia.





**Stockholders
      Agreement**





Upon
      the
      effectiveness of our plan of reorganization, AETG entered into a stockholders
      agreement, dated December 24, 2003, for its common shares, with GSC.





***Transfer
      Restrictions***





The
      stockholders agreement prohibits transfers of common shares except (1) to
      investors who join the stockholders agreement, (2) in a registered public
      offering, (3) pursuant to "Tag-Along Rights," which would require
      shareholders to include shares of holders of 10% or greater of common shares
      (as
      of the effective date of our plan of reorganization), at their option, in the
      event of a sale to a third party, (4) pursuant to "Drag-Along Rights,"
      which would require shareholders to sell all or part of their common shares
      in
      the event of a sale by GSC of a majority or more of the issued and outstanding
      common shares, and (5) to a financial institution to secure borrowings in a
      bona fide pledge.





The
      stockholders agreement contains "Preemptive Rights," which allow shareholders
      the right to purchase common shares if AETG makes certain sales of common shares
      at less than fair market value (as determined by AETG's board of directors),
      allowing investors to maintain their respective ownership percentage in AETG.





***Corporate
      Governance***





The
      stockholders agreement provides that each shareholder thereto will vote its
      common shares towards the election of (i) directors nominated by GSC
      constituting a majority of the board so long as GSC is the record holder of
      at
      least 35% of AETG's common shares, or at least one director nominated by GSC
      so
      long as GSC is the record holder of at least 10% of AETG's common shares, and
      (ii) the Chief Executive Officer of AETG as a director.


40





***Minority
      Shareholder Protection***





AETG
      will
      not, without prior approval of the holders of a majority of common shares that
      is not owned by GSC:





•
            redeem
                or repurchase any common shares unless each holder of common shares
                may
                participate on a pro rata basis;





•
            pay
                dividends on its common shares unless the dividend is paid to all
                holders
                of common shares on a pro rata basis;





•
            with
                some exceptions, engage (or permit any subsidiary to engage) in any
                transaction with a director, officer or affiliate unless (a) the
                transaction is approved by a majority of the directors of AETG who
                have no
                financial interest in the transaction and (b) such transaction is
                fair to AETG from a financial standpoint or on terms comparable to
                terms
                that would be obtained in an arm's-length transaction; or





•
            amend
                or modify AETG's charter documents in a way that materially limits
                or
                conflicts with the terms of the stockholders agreement.





***Registration
      Rights***





The
      stockholders agreement also contains registration rights for the common shares.
      Shareholders have "Piggyback Registration Rights," which require AETG, if it
      proposes to register any of its common shares under the Securities Act of 1933,
      as amended in connection with the offering of such shares, to register all
      of
      the shares of shareholders who request registration. GSC has three "Demand
      Registrations" as long as GSC is the record holder of at least 20% of AETG's
      common shares. A Demand Registration requires AETG to prepare and file with
      the
      SEC a registration statement on the appropriate form and maintain the
      effectiveness for 180 days or until all shares subject to the Demand
      Registration have been sold.





***Amendment***





The
      stockholders agreement may be amended only with the approval of AETG, holders
      of
      at least 90% of the common shares and GSC (so long as it holds at least 35%
      of
      AETG's common shares).





**Management
      Agreements**





Upon
      the
      effectiveness of our plan of reorganization, AETG and the Company entered into
      an advisory services agreement, dated December 24, 2003, with
      GSCP, Inc., an affiliate of GSC. Under the agreement, GSCP, Inc.
      agreed to advise and consult with our boards of directors and management on
      certain business, operational and financial matters and provides other advisory
      services. The agreement provides that AETG and the Company will pay
      GSCP, Inc. an annual fee of $500,000. The Company expensed $400,000,
      $400,000 and $500,000 annually for the years ended June 30, 2006, 2007, and
      2008, respectively. The balance of the fee was charged to AETG in fiscal years
      ended June 30, 2006 and 2007. The advisory services agreement terminates when
      GSC ceases to own any common shares issued upon the effectiveness of the plan
      of
      reorganization.




On
      February 10, 2004, we entered into a management agreement with Atlantic
      Transit II Corp. ("ATC") and Atlantic School Bus Corp. ("ASBC"), subsidiaries
      of
      AETG. Under the agreement, we provide certain administrative services on behalf
      of ATC and ASBC and their affiliates. The agreement provides that ASBC will
      pay
      us a monthly fee of $30 per route vehicle for which we provide administrative
      services. The agreement continues until either ATC or the Company elects to
      terminate it. Under this agreement, the Company earned $56,250, $4,710 and
      $0
      for the years ended June 30, 2006, 2007 and 2008, respectively. The
      assets of ASBC were sold in July 2006, and this agreement has been
      terminated.





**Tax
      Sharing Agreement**





AETG
      and
      its subsidiaries, including the Company, entered into a tax sharing agreement,
      dated December 22, 2000, that provides for a consolidated filing of federal
      income tax and allocates federal tax liabilities.





**Review
      of Transactions with Related Parties**





The
      Company does not have a written policy regarding the review, approval and
      ratification of transactions with related parties. Instead, as a general matter,
      the Company’s Board of Directors and management review and approve all material
      transactions with related parties. Such review is conducted in order to, among
      other things, insure that such transactions comply with the terms of the
      stockholders agreement, the indenture governing the notes and our Amended and
      Restated Credit Facility (and previously, the terms of the indentures governing
      our previously outstanding notes and our prior senior credit facilities), each
      of which contain covenants prohibiting transactions with our officers, directors
      and affiliates if certain requirements are not met. In addition, the
      stockholders agreement and the management agreement with GSCP, Inc. were entered
      into pursuant to our plan of reorganization, as approved by the United States
      Bankruptcy Court.


41





**Item
      14. Principal Accounting Fees and Services.**





The
      following table sets forth the aggregate fees billed by BDO Seidman for
      professional services rendered to the Company for the audit of the Company's
      annual financial statements for the fiscal years ended June 30, 2007 and 2008,
      for the reviews of the financial statements included in the Company's Quarterly
      Reports on Form 10-Q for those fiscal years, and for other services rendered
      on
      behalf of the Company during those fiscal years. All of such fees were
      pre-approved by the Company’s Board of Directors.




**Fiscal year 2007**
            
            **Fiscal year 2008**Audit
                Fees
            
            $
            555,925
            
            $
            408,800Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —




42





**Part
      IV**





**Item
      15. Exhibits, Financial Statement Schedules.**





(a)
      1.
      Financial statements filed in item 8 of this Form 10-K.





(b)
      Exhibits





3.1
            
            Restated
                Certificate of Incorporation of the Company (incorporated by reference
                to
                Exhibit 3.1 of the Company's Annual Report on Form 10-K, filed
                with the SEC on October 15, 1997, File
                No. 333-25507).3.2
            
            Certificate
                of Amendment, dated November 19, 2003, to the Certificate of
                Incorporation of the Company (incorporated herein by reference to
                Exhibit 3.2 to Atlantic Express Transportation Corp.'s Registration
                Statement on Form S-4, File No. 333-116749).3.3
            
            Certificate
                of Amendment, dated April 20, 2004, to the Certificate of
                Incorporation of the Company (incorporated herein by reference to
                Exhibit 3.3 to Atlantic Express Transportation Corp.'s Registration
                Statement on Form S-4, File No. 333-116749).3.4
            
            Amended
                and Restated By-Laws of the Company (incorporated herein by reference
                to
                Exhibit 3.4 to Atlantic Express Transportation Corp.'s Registration
                Statement on Form S-4, File No. 333-116749).4.1
            
            Indenture,
                dated May 15, 2008, relating to the Senior Secured Floating Notes
                due
                2012, among the Company, the guarantors party thereto and The Bank
                of New
                York, as trustee and collateral agent, including the form of the
                note
                (incorporated herein by reference to Exhibit 4.1 to Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-144249).4.2
            
            Registration
                Rights Agreement, dated May 15, 2008, between the Company and
                Jefferies & Company, Inc., as initial purchaser
                (incorporated herein by reference to Exhibit 4.2 to Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-144249).4.3
            
            Security
                Agreement, dated May 15, 2008, among the Company, the guarantors
                party
                thereto and The Bank of New York, as collateral agent (incorporated
                herein
                by reference to Exhibit 4.3 to Atlantic Express Transportation
                Corp.'s Registration Statement on Form S-4, File
                No. 333-144249).4.4
            
            Intercreditor
                Agreement, dated May 15, 2008, among the Company, the guarantors
                party
                thereto, The Bank of New York, as collateral agent, and Wachovia
                Bank,
                National Association (incorporated by reference to Exhibit 4.4 of the
                Atlantic Express Transportation Corp.'s Registration Statement on
                Form S-4, File No. 333-144249).10.1
            
            Third
                Amended and Restated Loan and Security Agreement, dated May 15, 2008
                (incorporated herein by reference to Exhibit 10.1 to Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333- 144249).10.2
            
            Fifth
                Amended and Restated Employment Agreement, dated April 18, 2008,
                among,
                Atlantic Express Transportation Group Inc., the Company and Domenic
                Gatto (incorporated herein by reference to Exhibit 10.1 to Atlantic
                Express Transportation Corp.'s Current Report of Form 8-K, filed
                with the
                SEC on April 24, 2008, File No. 000-24247).10.3
            
            Fifth
                Amended and Restated Employment Agreement, dated April 18, 2008,
                among,
                Atlantic Express Transportation Group Inc., the Company and Nathan
                Schlenker (incorporated herein by reference to Exhibit 10.2 to
                Atlantic Express Transportation Corp.'sCurrent
                Report of Form 8-K, filed with the SEC on April 24, 2008, File
                No. 000-24247).10.4
            
            Retention
                Agreement, dated December 24, 2003, between Atlantic Express
                Transportation Group Inc. and Peter Frank (incorporated herein by
                reference to Exhibit 10.4 to Atlantic Express Transportation Corp.'s
                Registration Statement on Form S-4, File
                No. 333-116749).10.5
            
            Advisory
                Services Agreement, dated December 24, 2003, among Atlantic Express
                Transportation Group Inc., the Company and GSCP, Inc.
                (incorporated herein by reference to Exhibit 10.6 to Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-116749).10.6
            
            Stockholders
                Agreement, dated as of December 24, 2003, between Atlantic Express
                Transportation Group Inc. and its stockholders (incorporated herein
                by reference to Exhibit 10.7 to Atlantic Express Transportation
                Corp.'s Registration Statement on Form S-4, File
                No. 333-116749).10.7
            
            The
                Board of Education of the City of New York, serial no. 0070, dated
                July 19, 1979 (incorporated by reference to Exhibit 10.12 of the
                Company's Annual Report on Form 10-K, filed with the SEC on
                October 15, 1997, File No. 333-25507).10.8
            
            The
                Board of Education of the City of New York, serial no. 8108
                (incorporated by reference to Exhibit 10.13 of the Company's Annual
                Report on Form 10-K, filed with the SEC on October 15, 1997,
                File No. 333-25507).10.9
            
            Extension
                and Thirteenth Amendment of Contract for Special Education Pupil
                Transportation Services by and among The Board of Education of the
                City of
                New York, Amboy Bus Co., Inc. and Staten Island Bus, Inc.
                (incorporated by reference to Exhibit 10.9 of the Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-144249).




43





10.10
            
            The
                Board of Education of the City of New York, serial no. 9888 by and
                between The Board of Education of the City of New York and Amboy
                Bus
                Co., Inc. (incorporated by reference to Exhibit 10.15 of the
                Company's Annual Report on Form 10-K, filed with the SEC on
                October 15, 1997, File No. 333-25507).10.11
            
            Extension
                and Eleventh Amendment of Contract for Regular Education Pupil
                Transportation Services, by and between The Board of Education of
                the City
                of New York and Amboy Bus Co., Inc. and Atlantic Queens Bus Corp.
                (incorporated by reference to Exhibit 10.11 of the Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-144249).10.12
            
            New
                York City Transit Authority Contract #00D7815B, dated July 2001,
                by and
                between New York City Transit Authority and Atlantic Paratrans, Inc.
                (incorporated herein by reference to Exhibit 10.14 to Atlantic
                Express Transportation Corp.'s Registration Statement on Form S-4,
                File No. 333-116749).10.13
            
            Tax
                Sharing Agreement, dated as of December 22, 2000, between Atlantic
                Express Transportation Group Inc. and the Company (incorporated
                herein by reference to Exhibit 10.15 to Atlantic Express
                Transportation Corp.'s Registration Statement on Form S-4, File
                No. 333-116749).10.14
            
            Amendment
                No.1 to Third Amended and Restated Loan and Security Agreement, dated
                as
                of January 1, 2008 (incorporated by reference to Exhibit 10.1 of
                Atlantic
                Express Transportation Corp.’s Quarterly Report, filed with the SEC on May
                14, 2008, File No. 000-24247).10.15
            
            Amendment
                No. 2 to Third Amended and Restated Loan and Security Agreement,
                dated as
                of August 28, 2008.
              (incorporated
                by reference to Exhibit 10.1 of Atlantic Express Transportation Corp.’s
                Current Report of Form 8-K, filed with the SEC on September 3, 2008,
                File
                No. 000-24247).10.16*
            
            Amendment
                No. 3 to Third Amended and Restated Loan and Security Agreement,
                dated as
                of September 25, 2008.21.1*
            
            Subsidiaries
                of the Registrant.31.1*
            
            Certification
                of Chief Executive Office pursuant to Rule
                13a-14/15d-14(a).31.2*
            
            Certification
                of Chief Financial Officer pursuant to Rule
                13a-14/15d-14(a).32.1*
            
            Certification
                of Chief Executive Office pursuant to Section 135032.2*
            
            Certification
                of Chief Financial Officer pursuant to Section
                1350


*
      Filed
      herewith


44




**ATLANTIC
      EXPRESS TRANSPORTATION CORP.**


**TABLE
      OF CONTENTS**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets
            F-3Consolidated
                Statements of Operations
            F-4Consolidated
                Statements of Shareholders’ Equity (Deficit)
            F-5Consolidated
                Statements of Cash Flows
            F-6Notes
                to Consolidated Financial Statements
            F-8




F-1





**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors


Atlantic
      Express Transportation Corp.


Staten
      Island, New York





We
      have
      audited the accompanying consolidated balance sheets of Atlantic Express
      Transportation Corp. and Subsidiaries as of June 30, 2007 and 2008 and the
      related consolidated statements of operations, shareholders’ equity (deficit),
      and cash flows for each of the three years in the period ended June 30, 2008.
      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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits include consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, 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 consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Atlantic Express
      Transportation Corp. and Subsidiaries at June 30, 2007 and 2008, the
      results of their operations and their cash flows for each of the three years
      in
      the period ended June 30, 2008 in conformity with accounting principles
      generally accepted in the United States of America.





/s/ BDO
      Seidman, LLP





New
      York,
      New York


September
      25, 2008




F-2




**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Consolidated
      Balance Sheets**


**June 30,****2007**
              
              **2008****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              6,881,838
              
              $
              2,682,752Accounts
                  receivable, net of allowance for doubtful accounts of $1,277,227
                  and
                  $1,409,877, respectively
              
              
              50,786,814
              
              
              48,422,466Inventories
              
              
              2,808,661
              
              
              3,508,576Prepaid
                  insurance
              
              
              30,697,527
              
              
              23,716,875Prepaid
                  expenses and other current assets
              
              
              4,191,206
              
              
              4,286,973Total
                  current assets
              
              
              95,366,046
              
              
              82,617,642Property,
                  plant and equipment, at cost, less accumulated
                  depreciation
              
              
              91,982,062
              
              
              83,042,309Other
                  assets:Restricted
                  cash and cash equivalents
              
              
              675,642
              
              
              —Transportation
                  contract rights, net
              
              
              2,648,294
              
              
              1,866,496Deferred
                  financing costs, net
              
              
              7,408,570
              
              
              5,936,307Deposits
                  and other non-current assets
              
              
              8,645,236
              
              
              6,590,993Total
                  other assets
              
              
              19,377,742
              
              
              14,393,796$
              206,725,850
              
              $
              180,053,747**Liabilities
                  and Shareholders’ (Deficit)**Current:Current
                  portion of long-term debt
              
              $
              754,503
              
              $
              766,232Current
                  portion of capital lease obligations
              
              
              1,615,448
              
              
              1,463,690Insurance
                  financing payable
              
              
              4,071,955
              
              
              3,247,089Controlled
                  disbursements account—checks issued not funded
              
              
              1,901,363
              
              
              3,303,864Accounts
                  payable, accrued expenses and other current liabilities
              
              
              13,974,241
              
              
              11,953,216Accrued
                  compensation
              
              
              2,962,784
              
              
              4,553,718Current
                  portion of insurance reserves
              
              
              833,862
              
              
              314,000Accrued
                  interest
              
              
              3,023,105
              
              
              5,123,377Payable
                  to creditors under the plan of reorganization- current
                  portion
              
              
              1,299,200
              
              
              137,389Total
                  current liabilities
              
              
              30,436,461
              
              
              30,862,575Long-term
                  debt, net of current portion
              
              
              187,567,072
              
              
              190,465,857Capital
                  lease obligations, net of current portion
              
              
              1,725,526
              
              
              261,846Insurance
                  reserves, net of current portion
              
              
              189,339
              
              
              486,394Interest
                  rate swap
              
              
              —
              
              
              5,786,069Deferred
                  income, net of current portion and other long-term
                  liabilities
              
              
              3,495,591
              
              
              3,566,722Deferred
                  state and local income taxes
              
              
              322,000
              
              
              220,000Payable
                  to creditors under the plan of reorganization, net of current
                  portion
              
              
              77,395
              
              
              —Total
                  liabilities
              
              
              223,813,384
              
              
              231,649,463Commitments
                  and contingenciesShareholders’
                  deficit:Common
                  stock, par value $.01 per share, authorized shares 1,303,200; issued
                  and
                  outstanding 945,263 and 1,032,293, respectively
              
              
              9,453
              
              
              10,323Additional
                  paid-in capital
              
              
              114,939,064
              
              
              114,939,064Accumulated
                  deficit
              
              
              (132,036,051
              )
              
              (166,545,103
              )Total
                  shareholders’ deficit
              
              
              (17,087,534
              )
              
              (51,595,716
              )$
              206,725,850
              
              $
              180,053,747





See
      accompanying Notes.


F-3





**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Consolidated
      Statements of Operations**





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008**Revenues:School
                bus operations
            
            $
            368,065,542
            
            $
            381,968,329
            
            $
            386,297,298Paratransit
                and transit operations
            
            
            45,992,526
            
            
            46,848,884
            
            
            47,230,325Total
                revenues
            
            
            414,058,068
            
            
            428,817,213
            
            
            433,527,623Costs
                and expenses:Cost
                of operations − School bus operations
            
            
            330,738,418
            
            
            338,913,983
            
            
            355,682,088Cost
                of operations − Paratransit and transit operations
            
            
            39,504,296
            
            
            41,618,775
            
            
            41,922,704General
                and administrative
            
            
            19,055,416
            
            
            17,861,314
            
            
            17,803,692Depreciation
                and amortization
            
            
            28,199,328
            
            
            19,093,483
            
            
            19,024,587Contract
                rights impairment
            
            
            —
            
            
            —
            
            
            267,958Total
                operating costs and expenses
            
            
            417,497,458
            
            
            417,487,555
            
            
            434,701,029Income
                (loss) from operations
            
            
            (3,439,390
            )
            
            11,329,658
            
            
            (1,173,406
            )Other
                income (expense):Interest
                expense:Interest
            
            
            (22,244,106
            )
            
            (28,652,601
            )
            
            (25,532,736
            )Deferred
                financing costs
            
            
            (3,697,104
            )
            
            (6,567,985
            )
            
            (1,568,485
            )Change
                in fair market value of interest rate swap
            
            
            —
            
            
            461,786
            
            
            (6,247,854
            )Reorganization
                costs
            
            
            (568,905
            )
            
            (80,037
            )
            
            (81,769
            )Other
            
            
            400,834
            
            
            492,358
            
            
            210,148Loss
                before benefit from income taxes and discontinued
                operations
            
            
            (29,548,671
            )
            
            (23,016,821
            )
            
            (34,394,102
            )Benefit
                from income taxes
            
            
            —
            
            
            300,000
            
            
            35,050Loss
                before discontinued operations
            
            
            (29,548,671
            )
            
            (22,716,821
            )
            
            (34,359,052
            )Income
                (loss) from discontinued operations
            
            
            (2,400
            )
            
            5,612,567
            
            
            —Net
                loss
            
            $
            (29,551,071
            )
            $
            (17,104,254
            )
            $
            (34,359,052
            )





See
      accompanying Notes.


F-4


**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Consolidated
      Statements of Shareholders’ Equity (Deficit)**





**Common**
              **shares,**
              **par value**
              **$0.01**
            
            **Additional paid-**
              **in capital**
            
            **Accumulated**
              **deficit**
            
            **Accumulated**
              **other**
              **comprehensive**
              **income (loss)**
            
            **Comprehensive**
              **income (loss)**
            
            **Total**Balance,
                June 30, 2005
            
            $
            6,516
            
            $
            110,042,001
            
            $
            (85,155,726
            )
            $
            83,711
            
            
            
            
            $
            24,976,502Net
                loss
            
            
            —
            
            
            —
            
            
            (29,551,071
            )
            
            —
            
            $
            (29,551,071
            )
            
            (29,551,071
            )Distribution
                to parent company
            
            
            —
            
            
            —
            
            
            (110,000
            )
            
            —
            
            
            —
            
            
            (110,000
            )Issuance
                of common stock
            
            
            2,937
            
            
            4,897,063
            
            
            —
            
            
            —
            
            
            —
            
            
            4,900,000Unrealized
                loss on marketable securities
            
            
            —
            
            
            —
            
            
            —
            
            
            (248,604
            )
            
            (248,604
            )
            
            (248,604
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (29,799,675
            )Balance,
                June 30, 2006
            
            
            9,453
            
            
            114,939,064
            
            
            (114,816,797
            )
            
            (164,893
            )
            
            
            
            
            (33,173
            )Net
                loss
            
            
            —
            
            
            —
            
            
            (17,104,254
            )
            
            —
            
            $
            (17,104,254
            )
            
            (17,104,254
            )Distribution
                to parent company
            
            
            —
            
            
            —
            
            
            (115,000
            )
            
            —
            
            
            —
            
            
            (115,000
            )Unrealized
                gain on marketable securities
            
            
            —
            
            
            —
            
            
            —
            
            
            164,893
            
            
            164,893
            
            
            164,893Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (16,939,361
            )Balance,
                June 30, 2007
            
            
            9,453
            
            
            114,939,064
            
            
            (132,036,051
            )
            
            —
            
            
            
            
            
            (17,087,534
            )Net
                loss
            
            
            —
            
            
            —
            
            
            (34,359,052
            )
            
            —
            
            $
            (34,359,052
            )
            
            (34,359,052
            )Distribution
                to parent company
            
            
            —
            
            
            —
            
            
            (150,000
            )
            
            —
            
            
            —
            
            
            (150,000
            )Issuance
                of common stock
            
            
            870
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            870Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (34,359,052
            )Balance,
                June 30, 2008
            
            $
            10,323
            
            $
            114,939,064
            
            $
            (166,545,103
            )
            $
            —
            
            
            
            
            $
            (51,595,716
            )





See
      accompanying Notes.


F-5


**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008****Cash
                flows from operating activities:**Net
                loss
            
            $
            (29,551,071
            )
            $
            (17,104,254
            )
            $
            (34,359,052
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Loss
                on sales of marketable securities and investments, net
            
            
            30,645
            
            
            67,841
            
            
            —Depreciation
            
            
            21,492,851
            
            
            18,579,643
            
            
            18,510,746Fixed
                asset impairment
            
            
            5,738,676
            
            
            —
            
            
            —Amortization
            
            
            4,665,976
            
            
            7,082,307
            
            
            2,082,325Contract
                rights impairment
            
            
            —
            
            
            —
            
            
            267,958Interest
                swap expense (income)
            
            
            —
            
            
            (461,786
            )
            
            6,247,855PIK
                interest expense
            
            
            —
            
            
            1,577,037
            
            
            —Amortization
                of original issue discount
            
            
            974,149
            
            
            1,793,422
            
            
            564,408Reserve
                for doubtful accounts receivable
            
            
            120,000
            
            
            120,000
            
            
            420,000Gain
                on sale of discontinued operations
            
            
            —
            
            
            (5,776,646
            )
            
            —Loss
                (gain) on sales of fixed assets, net
            
            
            1,099,267
            
            
            434,701
            
            
            (34,352
            )Deferred
                state and local income taxes
            
            
            —
            
            
            (300,000
            )
            
            (102,000
            )Decrease
                (increase) in:Accounts
                receivable
            
            
            (1,373,212
            )
            
            (4,822,015
            )
            
            1,944,348Inventories
            
            
            (140,698
            )
            
            (44,760
            )
            
            (699,915
            )Prepaid
                expenses and other current assets
            
            
            (4,036,943
            )
            
            4,434,150
            
            
            6,423,099Deposits
                and other non-current assets
            
            
            (3,749,277
            )
            
            (410,923
            )
            
            2,054,243Increase
                (decrease) in:Accounts
                payable, accrued expenses, other current liabilities and accrued
                compensation
            
            
            (589,305
            )
            
            (14,858,987
            )
            
            1,670,181Controlled
                disbursement account
            
            
            (2,523,058
            )
            
            (301,301
            )
            
            1,402,501Insurance
                financing payable
            
            
            102,809
            
            
            (14,969
            )
            
            (824,866
            )Payable
                to creditors under the plan of reorganization
            
            
            (1,620,983
            )
            
            (2,059,777
            )
            
            (1,239,206
            )Insurance
                reserve and other long-term liabilities
            
            
            (1,079,113
            )
            
            (725,872
            )
            
            (151,675
            )Net
                cash provided by (used in) operating activities
            
            
            (10,439,287
            )
            
            (12,792,189
            )
            
            4,176,598**Cash
                flows from investing activities:**Additions
                to property, plant and equipment
            
            
            (6,056,643
            )
            
            (17,646,116
            )
            
            (9,907,008
            )Purchase
                of transportation contract rights
            
            
            (1,764,272
            )
            
            —
            
            
            —Proceeds
                from sales of business
            
            
            —
            
            
            11,760,113
            
            
            —Proceeds
                from sales of fixed assets
            
            
            11,028,370
            
            
            718,162
            
            
            576,988Decrease
                in restricted cash and cash equivalents
            
            
            1,535,587
            
            
            3,052,503
            
            
            675,642Purchases
                of marketable securities
            
            
            (3,913,256
            )
            
            (547,507
            )
            
            —Proceeds
                from sales or redemptions of marketable securities
            
            
            3,760,484
            
            
            5,072,704
            
            
            —Net
                cash provided by (used in) investing activities
            
            
            4,590,270
            
            
            2,409,859
            
            
            (8,654,378
            )





**Continues**


F-6


**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008****Cash
                flows from financing activities:**Payment
                of the Old Notes
            
            $
            —
            
            $
            (116,265,000
            )
            $
            —Proceeds
                from issuance of the Notes
            
            
            —
            
            
            182,225,000
            
            
            —Proceeds
                from sale of common stock
            
            
            4,900,000
            
            
            —
            
            
            870Proceeds
                from (payments to) Amended and Restated Credit Facility
            
            
            (1,653,051
            )
            
            (14,727,909
            )
            
            2,924,483Payment
                of senior unsecured notes
            
            
            —
            
            
            (4,900,000
            )
            
            —Payment
                of third priority senior secured notes
            
            
            —
            
            
            (15,480,506
            )
            
            —Distribution
                to parent company
            
            
            (110,000
            )
            
            (115,000
            )
            
            (150,000
            )Payment
                of letter of credit advance
            
            
            —
            
            
            (3,500,000
            )
            
            —Principal
                payments on borrowings and capital lease obligations
            
            
            (3,314,360
            )
            
            (2,697,658
            )
            
            (2,400,437
            )Deferred
                financing costs
            
            
            (307,262
            )
            
            (7,776,030
            )
            
            (96,222
            )Net
                cash provided by (used in) financing activities
            
            
            (484,673
            )
            
            16,762,897
            
            
            278,694Net
                increase (decrease) in cash and cash equivalents
            
            
            (6,333,690
            )
            
            6,380,567
            
            
            (4,199,086
            )Cash
                and cash equivalents, beginning of year
            
            
            6,834,961
            
            
            501,271
            
            
            6,881,838Cash
                and cash equivalents, end of period
            
            $
            501,271
            
            $
            6,881,838
            
            $
            2,682,752**Supplemental
                disclosures on cash flow information:**Cash
                paid during the period for:Interest
            
            $
            20,468,888
            
            $
            27,572,904
            
            $
            22,853,230Income
                taxes
            
            $
            236,467
            
            $
            145,621
            
            $
            91,501**Supplemental
                disclosure of non-cash financing activities:**Trade-in
                value of vehicles exchanged
            
            $
            —
            
            $
            —
            
            $
            980,000Acquisition
                cost of vehicles exchanged
            
            $
            —
            
            $
            —
            
            $
            675,006Loans
                incurred for purchases of vehicles
            
            $
            461,510
            
            $
            590,528
            
            $
            206,623Conversion
                of PIK interest into debt
            
            $
            —
            
            $
            1,577,037
            
            $
            —





See
      accompanying Notes.


F-7


**Atlantic
      Express Transportation Corp. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**





**1.**
            **Business**





Atlantic
      Express Transportation Corp. ("AETC" or the "Company"), a subsidiary of Atlantic
      Express Transportation Group Inc. ("AETG"), is one of the largest providers
      of school bus transportation in the United States, providing services currently
      to various municipalities in New York, Missouri, Massachusetts, California,
      Pennsylvania, New Jersey and Illinois. In addition to its school bus
      transportation operations, AETC also provides services to a public transit
      system for physically or mentally challenged passengers, fixed route transit,
      express commuter line charter and tour services. Since 1998, GSC NJ through
      its
      affiliate Greenwich Street Capital ("GSC") has been the majority holder of
      AETG.





**2.**
            **Summary
                of Significant Accounting
                Policies**





**Basis
      of Presentation**





The
      consolidated financial statements include the accounts of AETC and its
      subsidiaries. All significant intercompany transactions and balances have been
      eliminated.





**Use
      of Estimates**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States requires
      management to make judgments, estimates and assumptions that affect the reported
      amounts of assets and liabilities, disclosures of contingent assets and
      liabilities at the date of the financial statements and the reported amount
      of
      revenues and expenses and the accompanying notes. Actual results could differ
      from those estimates.





The
      Company bases its estimates and judgments on historical experience and on
      various other assumptions that it believes are reasonable under the
      circumstances. Amounts reported based upon these assumptions, include but are
      not limited to property, plant and equipment, transportation contract rights,
      insurance reserves, allowance for doubtful accounts, income taxes, revenues
      and
      other long-lived assets.





**Revenue
      Recognition**





Revenues
      from school bus and paratransit and transit operations are recognized when
      services are provided. The Company bills customers on a monthly basis based
      upon
      the completion of bus routes to all school bus customers and service hours
      completed to all paratransit customers, which in most cases are based upon
      contracts with customers.





**Cash
      Equivalents**





Cash
      equivalents consist of short-term, highly liquid investments with maturities
      of
      90 days or less when purchased, which are readily convertible into
      cash.





**Inventories**





Inventories
      primarily consist of fuel, parts and supplies, which are valued at the lower
      of
      cost or market value. Cost is determined using the first-in, first-out
      method.





**Property,
      Plant and Equipment**





Property,
      plant and equipment are stated at cost and depreciated utilizing the
      straight-line method over the lives of the related assets. The useful lives
      of
      property, plant and equipment for purposes of computing depreciation are as
      follows:





**Years**Building
                and improvements
            10 - 31.5Transportation
                equipment
            5 - 15Other
            3 - 7





Maintenance
      costs are expensed as incurred and renewals and improvements are
      capitalized.




F-8




**Long-Lived
      Assets**





Long-lived
      assets, such as intangible assets and property, plant and equipment, are
      evaluated for impairment when events or changes in circumstances indicate that
      the carrying amounts of the assets may not be recoverable through the estimated
      undiscounted future cash flows from the use of these assets. When any such
      impairment exists, the related assets will be written down to their fair value.
      Based upon proceeds from auction sales of vehicles and offers to purchase assets
      or sale of assets of certain of the Company’s operations the Company recorded
      impairment charges of $5,738,676 for the fiscal year ended June 30, 2006. These
      charges are included in depreciation and amortization on the Consolidated
      Statements of Operations and shown separately on the Consolidated Statements
      of
      Cash Flows.





**Transportation
      Contract Rights**





Transportation
      contract rights primarily represent the value the Company assigned to the cost
      of investments in certain of our school bus subsidiaries in excess of the book
      value of the companies acquired. In addition, AETC has purchased from unrelated
      third parties certain transportation contract rights with respect to revenue
      contracts and travel routes. Using earnings before interest, income taxes,
      depreciation and amortization (“EBITDA”) as a measurement tool, the Company
      reviews the financial performance of its subsidiary bus companies that have
      transportation contract rights, at least annually. If this review indicates
      that
      the transportation contract rights are likely to be impaired in value, the
      Company projects the future undiscounted cash flows attributable to such
      subsidiary bus company and compares it to the carrying value of the
      transportation contract rights assets. The major impacts to the future
      undiscounted cash flows are either a reduction of service requirements (e.g.,
      routes) that decrease revenue, an increase in costs and expenses at a rate
      greater than the corresponding contractual revenue increase, or a combination
      of
      both factors. If this comparison indicates that the future undiscounted cash
      flows attributable to the underlying assets are unlikely to exceed the carrying
      value of the transportation contract rights, an impairment charge is taken
      based
      on the difference between the estimated future cash flows, determined to be
      the
      estimated fair value, and the carrying value of the transportation contract
      rights. Using this methodology, it was determined that an impairment charge
      of
      $267,958 for the fiscal year ended June 30, 2008, was necessary to adjust
      the transportation contract rights to fair value. The impairment charge in
      the
      fiscal year ended June 30, 2008 was in a subsidiary bus company in New
      Jersey. There was no impairment charges for the fiscal years ended June 30,
      2006
      and June 30, 2007.





Transportation
      contract rights are amortized on a straight-line basis over a 12 year period,
      which represents the Company's estimate of the average length of the contracts
      and expected renewal periods.





Transportation
      contract rights are comprised of the following:





**June 30,****2007**
            
            **2008**Gross
                carrying amount
            
            $
            17,679,044
            
            $
            17,679,044Less
                accumulated amortization
            
            
            15,030,750
            
            
            15,812,548Transportation
                contract rights, net
            
            $
            2,648,294
            
            $
            1,866,496





Amortization
      expense recorded for the years ended June 30, 2006, 2007 and 2008 was $961,119,
      $513,840 and $513,840, respectively.




Estimated
                amortization expense for the years ending June 30,2009
            
            $
            321,4662010
            
            
            321,4662011
            
            
            250,8372012
            
            
            160,0792013
            
            
            160,079





**Deferred
      Financing Costs**





Deferred
      financing costs of $7.7 million which were incurred in connection with the
      issuance of the $185,000,000
      Senior Secured Floating Rate Notes due 2012 (the “Notes”) and the
      Amended and Restated Credit Facility are amortized on a straight-line basis,
      which approximates the effective interest rate method, over the term of the
      financing to which the costs relate, which range from 55.5 to 59 months.
      Unamortized deferred financing costs of $2.9 million associated with the $105,000,000
      million 12% Senior Secured Notes due 2008 and $10,000,000 million Senior Secured
      Floating Rate Notes due 2008  (collectively
      the “Old Notes”) and the
      previous senior credit facility were expensed in May 2007. These charges are
      included in interest expense on the Consolidated Statements of
      Operations.




F-9




**Insurance
      Coverage and Reserves**





The
      majority of the Company’s primary automobile coverage ($1 million per
      occurrence) and all of the Company’s workers compensation insurance coverage
      (except for one subsidiary which has “First Dollar” coverage) is administered
      through a third party insurance company. The Company funds, through monthly
      installments, loss funds specified by the insurance company, plus fronting
      charges. These loss funds are used to pay up to the first $500,000 of each
      loss;
      operating costs are charged and prepaid assets are reduced by estimated claim
      losses and fronting charges. The charges are based upon estimated ultimate
      liability related to these claims and differ from period to period due to claim
      payments, and settlement practices as well as changes in development factors
      due
      to the assumed future cost increases and discount rates. On a quarterly basis,
      the Company receives from the insurance company estimates of selected ultimate
      losses that are based on actuarial analysis. Charges to operations are then
      adjusted to reflect these calculations.





For
      the
      years ended June 30, 2006, 2007 and 2008 the Company recorded adjustments
      related to expenses (income) changes in prior years claims estimates to its
      insurance expense as follows:





**Year Ended**
            
            **Workers**
              **Compensation**
            
            **Automobile**
              **Liability**June
                30, 2006
            
            $
            (1,263,490
            )
            $
            1,017,515June
                30, 2007
            
            
            278,909
            
            
            (522,204
            )June
                30, 2008
            
            
            442,152
            
            
            (447,810
            )




Prior
      to
      the year ended June 30, 2002, the Company self insured its deductibles and
      recorded reserves for these deductibles based upon estimated ultimate claim
      losses, including those incurred but not reported. Reserve requirements at
      June
      30, 2008 in relation to these deductibles were $0.8 million.





**Income
      Taxes**





AETC
      follows the liability method under Statement of Financial Accounting Standards
      ("SFAS") No. 109, "Accounting for Income Taxes." The primary objectives of
      accounting for taxes under SFAS No. 109 are to (a) recognize the
      amount of tax payable for the current year and (b) recognize the amount of
      deferred tax liability or asset for the future tax consequences attributable
      to
      temporary differences between the financial statements' carrying amounts of
      existing assets and liabilities and their respective tax bases and of events
      that have been reflected in AETC's financial statements or tax returns. When
      the
      realization of a deferred tax asset is not considered to be more likely than
      not, a valuation allowance is recorded against that deferred tax
      asset.





AETC
      files consolidated federal, state and local income tax returns with its parent
      and affiliates. The income tax charge or benefits allocated to AETC is based
      upon an allocation method determined by the group under a tax sharing agreement.
      The balance identified as deferred tax assets and liabilities can, in substance,
      be considered the equivalent to amounts due from and due to this affiliated
      group based upon the application of this method.




**Fair
      Value of Financial Instruments**





The
      carrying value of financial instruments including cash and cash equivalents,
      accounts receivable including retainage, accounts payable, and short term debt
      approximated their fair value as of June 30, 2007 and 2008, due to either
      their short maturity or terms similar to those available to similar companies
      in
      the open market. At June 30, 2008, the fair value of the Company's Notes
      was approximately $82.8 million (based upon trade closest to year end
      received from the underwriter) compared to the carrying value of
      $185.0 million (before original issue discount). At June 30, 2007, the
      fair value of the Company's Notes was approximately $187.8 million (based
      upon trade closest to year end received from the underwriter) compared to the
      carrying value of $185.0 million (before original issue
      discount).




F-10




**Interest
      Rate Swap**





Effective
      as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
      reduce our exposure to interest rate fluctuations on our notes, which bear
      interest at LIBOR plus a margin of 7.25%. The Swap has a notional amount of
      $185
      million with a fixed rate of 5.21% thereby effectively converting the floating
      rate notes to a fixed rate obligation of 12.46%. The Swap will expire in April
      15, 2010. On the interest payment dates of the notes, the difference between
      LIBOR and 5.21% will be settled in cash. In accordance with SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* the Swap
      does not qualify for "Cash Flow Hedge Accounting" treatment since the
      documentation of the accounting treatment was not done contemporaneously with
      entering into the agreement. The change in the fair market value of the Swap
      of
      $(461,786) is reflected as a reduction of interest expense and $6,247,854 is
      reflected as an increase of interest expense at June 30, 2007 and 2008,
      respectively.




**Recent
      Accounting Pronouncements**





In
      June
      2006, the FASB issued Interpretation 48, “ *Accounting
      for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.
      109* ”
(“FIN
      48”). FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 was effective for the fiscal year
      ended June 30, 2008 year for positions for which it is reasonably possible
      that
      the total amounts of unrecognized tax benefits will significantly increase
      or
      decrease within 12 months of the reporting date. The Company has assessed the
      impact of FIN 48 and it did not have a material effect on its consolidated
      financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. This
      statement is effective for us for the fiscal year beginning July 1, 2008.
      We currently believe that adoption of SFAS No. 157 will not have a material
      impact on our financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 gives us the irrevocable option to carry many financial assets and
      liabilities at fair values, with changes in fair value recognized in earnings.
      This statement is effective for us for the fiscal year beginning July 1,
      2008. We currently believe that adoption of SFAS No. 159 will not have a
      material impact on our financial statements.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
      2007), *Business
      Combinations* ,
      which
      replaces SFAS No. 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized in the purchase accounting. It also
      changes the recognition of assets acquired and liabilities assumed arising
      from
      contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for us beginning July 1,
      2009 and will apply prospectively to business combinations completed on or
      after
      that date.





In
      March
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133,* which
      requires additional disclosures about the objectives of the derivative
      instruments and hedging activities, the method of accounting for such
      instruments under SFAS No. 133 and its related interpretations, and a
      tabular disclosure of the effects of such instruments and related hedged items
      on our financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for us beginning January 1, 2009. We are
      currently assessing the potential impact that adoption of SFAS No. 161 may
      have on our financial statements.





**3.**
            **Retainage**





Pursuant
      to a certain municipal school bus contract and paratransit contract, certain
      contractual amounts (retainage) are withheld by customers from billings as
      a
      guarantee of performance by AETC. At June 30, 2007 and at June 30, 2008
      retainage was $2,458,848 and $1,916,667, respectively. These amounts are
      classified as current accounts receivable, as they are normally paid within
      one
      year.




F-11


**4.** **Restricted
        Cash and Cash Equivalents**





Restricted
      cash and cash equivalents of $675,642 at June 30, 2007 was pledged as collateral
      security for letters of credit outstanding in the amount of $643,851 as of
      June
      30, 2007.





**5.** **Property,
      Plant and Equipment**





Property,
      plant and equipment consists of the following:





**June 30,****2007**
            
            **2008**Land
            
            $
            4,408,096
            
            $
            4,408,096Building
                and improvements
            
            
            16,452,982
            
            
            17,187,059Transportation
                equipment
            
            
            201,347,582
            
            
            199,747,382Transportation
                equipment acquired under capital leases
            
            
            10,360,898
            
            
            10,360,898Machinery
                and equipment
            
            
            38,949,049
            
            
            39,302,913Furniture
                and fixtures
            
            
            5,101,648
            
            
            5,756,705276,620,255
            
            
            276,763,053Less
                accumulated depreciation
            
            
            (184,638,193
            )
            
            (193,720,744
            )$
            91,982,062
            
            $
            83,042,309





Based
      upon proceeds from auction sales of vehicles and offers to purchase or sale
      of
      assets of certain of the Company’s operations the Company has taken impairment
      losses of $5.7 million in 2006, to write down these assets to their estimated
      fair value. This loss has been included in depreciation and amortization on
      the
      Consolidated Statement of Operations.





Accumulated
      depreciation of assets under capital leases was $2,659,832 and $3,450,138 as
      of
      June 30, 2007, and June 30, 2008, respectively.




**6.** **Accounts
      Payable, Accrued Expenses and Other Liabilities**





Accounts
      payable, accrued expenses and other liabilities consist of the
      following:





**June
                30,****2007**
            
            **2008**Accounts
                payable
            
            $
            3,645,765
            
            $
            4,168,655Payroll
                taxes withheld and accrued
            
            
            1,550,393
            
            
            1,733,732Other
                accrued expenses and taxes
            
            
            3,383,822
            
            
            3,365,639Accrued
                employee benefits
            
            
            5,394,261
            
            
            2,685,190Total
            
            $
            13,974,241
            
            $
            11,953,216




**7.** **Debt**





The
      following represents the debt outstanding at June 30, 2007 and June 30,
      2008:





**June 30,**
            
            **June 30,****2007**
            
            **2008**Senior
                Secured Floating Rate Notes, due 2012 with cash interest payable
                October 15thand April 15th(a)
            
            $
            185,000,000
            
            $
            185,000,000Less:
                original issue discount associated with the issuance of the Notes,
                net
                (a)
            
            
            (2,704,449
            )
            
            (2,140,041
            )Amended
                and Restated Credit Facility (b)
            
            
            3,027,793
            
            
            5,952,274Various
                notes payable, primarily secured by transportation equipment, with
                interest rates ranging from 8% - 10.3%
            
            
            2,998,231
            
            
            2,419,856188,321,575
            
            
            191,232,089Less
                current portion
            
            
            754,503
            
            
            766,232Long-term
                debt, net of current portion
            
            $
            187,567,072
            
            $
            190,465,857


F-12





A
      summary
      of interest expense is as follows:





**June 30,****2006**
            
            **2007**
            
            **2008**Continuing
                operations:Interest
                expense
            
            $
            21,269,955
            
            $
            23,409,179
            
            $
            24,968,328Amortization
                of deferred financing expense
            
            
            3,697,104
            
            
            6,567,985
            
            
            1,568,485Pre-payment
                penalties
            
            
            —
            
            
            3,450,000
            
            
            —Change
                in fair market value of interest rate swap
            
            
            —
            
            
            (461,786
            )
            
            6,247,854Amortization
                of original issue discount
            
            
            974,151
            
            
            1,793,422
            
            
            564,408Subtotal
            
            
            25,941,210
            
            
            34,758,800
            
            
            33,349,075Discontinued
                operations:Interest
                expense
            
            
            44
            
            
            —
            
            
            —Amortization
                of deferred financing expense
            
            
            —
            
            
            —
            
            
            —Amortization
                of original issue discount
            
            
            —
            
            
            —
            
            
            —Subtotal
            
            
            44
            
            
            —
            
            
            —Total
            
            $
            25,941,254
            
            $
            34,758,800
            
            $
            33,349,075





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





Annual
      interest on the Notes is equal to the applicable LIBOR rate plus a margin of
      7.25%. The applicable LIBOR rate on June 30, 2008 was 2.68%. Interest payments
      that are required semiannually through their maturity date on April 15, 2012
      commenced on October 15, 2007. Effective as of May 15, 2007, we entered into
      the
      Swap to reduce our exposure to interest rate fluctuations on the Notes.
      ( see
      Note
      2 )




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





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




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




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




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





(b)
            Concurrently
                with the issuance of the Notes, the Company and substantially all
                of its
                subsidiaries also amended and restated its existing senior credit
                facility
                with Wachovia to provide up to $35.0 million of borrowing availability
                under a revolving credit facility, subject to customary borrowing
                conditions, plus a $10.0 million letter of credit facility. The Amended
                and Restated Credit Facility is secured by a first priority lien
                on
                substantially all of the Company’s and its subsidiaries’ assets, other
                than collateral securing the Notes on a first priority basis, and
                by a
                second priority lien on the real property securing the Notes on a
                first
                priority basis. In addition, the term of the credit facility was
                extended
                to December 31, 2011. The Amended and Restated Credit Facility contains
                certain financial covenants, including a minimum last twelve month
                (“LTM”)
                EBITDA covenant of $26.0 million, which will only be tested if excess
                availability falls below certain levels. The Company’s LTM EBITDA was
                $18.3 million as of June 30, 2008, however the Company has maintained
                an
                availability over the required threshold and therefore was not subject
                to
                the test for the periods ended June 30, 2008 or through September
                26,
                2008. The Amended and Restated Credit Facility also contains customary
                events of default.


F-13





The
      borrowing capacity under the Amended and Restated Credit Facility is based
      upon
      85% of the net amount of eligible accounts receivable less reserves. Loans
      under
      the facility bear interest at the prime rate which was 5% at June 30, 2008.
      Letters of credit are subject to a fee of 1% per annum payable monthly in
      arrears and any amounts paid by lenders for letters of credit will bear the
      same
      rate as loans under our revolving facility. The Company paid a closing fee
      of
      $400,000 which is being amortized over the term of the financing and is required
      to pay a servicing fee of $10,000 per month, plus a monthly fee of 0.5% on
      any
      unused portion of its Amended and Restated Credit Facility.





At
      June
      30, 2008, the Company’s debt under its $35.0 million Amended and Restated Credit
      Facility was approximately $6.0 million, and it had $13.2 million of borrowing
      availability after $6.8 million of reserves, based on the Company’s borrowing
      base calculations.




Our
        obligation under the Swap is secured by the collateral securing our Amended
        and
        Restated Credit Facility and in connection there with total reserves of
        approximately $6.8 million, $6.7 million, $7.4 million and $7.8 million for
        June
        2008, July 2008, August 2008 and September 2008, respectively, were established
        against our borrowing base. In February 2008, our senior credit facility
        was
        amended to change the calculation of the borrowing base for the purpose of
        the
        calculation of excess availability, solely in relation to testing the EBITDA
        covenant, to exclude the first $5.0 million of reserves established in
        connection with our Swap. This change is effective until February 15, 2009.
        Until August 28, 2008, excess availability was required to be at least $5.0
        million at all times during the period from July 1 to August 31 of any year,
        and
        $8.0 million for the balance of the fiscal year. As of August 28, 2008 the
        senior credit facility was amended to extend the period where excess
        availability required is $5.0 million from August 31 of any year to September
        15
        of any year. As of September 25, 2008, the senior credit facility was further
        amended such that the excess availability requirement is as follows: (i)
        $5,000,000 at all times during the period from July 1, 2008 to September
        15,
        2008, (ii) $8,000,000 at all times during the period from September 16,
        2008 to September 30, 2008, (iii) $4,500,000 at all times during the period
        from October 1, 2008 to July 31, 2009, (iv) $4,000,000 at all times during
        the
        period from August 1, 2009 to September 15, 2009, (v) $4,500,000 at all times
        during the period from September 16, 2009 to November 1, 2009,
        (vi) $8,000,000 at all times during the period from November 2, 2009
        to June 30, 2010, (vii) $5,000,000 at all times during the period from July
        1 to September 15 of any year (commencing in 2010), and (viii) $8,000,000
        at all times during the period from September 16 of any year (commencing
        in
        2010) through June 30 of the immediately following year. Based upon these
        amendments, the Company did not need to test the EBITDA covenant through
        September 26, 2008. If this reserve increases it may have an adverse effect
        on
        the Company’s liquidity, whereby the Company might have to pursue additional
        funding alternatives including the sale of certain assets or operations to
        satisfy our liquidity requirements.




LTM
                EBITDA was $18.3 million as of June 30, 2008 and we expect LTM EBITDA
                to
                be below $26.0 million for the next twelve months. If our excess
                availability for the purpose of testing the EBITDA covenant (see
                Note 2)
                falls below certain levels, this will generate a default under our
                Amended
                and Restated Credit Facility and under certain circumstances cause
                a cross
                default under the Notes. Although the Company believes that it would
                be
                able to receive a waiver of this default from Wachovia, there can
                be no
                assurance that this is the case or what the cost to the Company might
                be.
                If the Company would not be able to receive a waiver, then the amount
                of
                the Amended and Restated Credit Facility would be reclassified to
                a
                short-term liability.




Aggregate
      yearly maturities of long-term debt based upon payment terms as of June 30,
      2008, are as follows:





2009
            
            $
            766,2322010
            
            
            732,4462011
            
            
            273,0952012
            
            
            191,442,9392013
            
            
            62,570Thereafter
            
            
            94,848Subtotal
            
            
            193,372,130Less:
                unamortized original issue discount
            
            
            2,140,041$
            191,232,089




F-14




**8.** **Obligations
      Under Capital Leases**





Assets
      under these leases aggregated $10,360,898. Payment terms range from 60 to
      72 months, with skip payments in July, August and September each year, with
      interest added to the debt in the same months.





Future
      annual lease payments under capital lease obligations as of June 30, 2008
      are as follows:





2009
            
            $
            1,600,8112010
            
            
            195,8252011
            
            
            101,978Total
            
            
            1,898,614Amount
                representing interest
            
            
            173,078Present
                value of future minimum lease payments
            
            
            1,725,536Current
                portion of capital lease obligations
            
            
            1,463,690Capital
                lease obligations, net of current portion
            
            $
            261,846





Aggregate
      maturities under capital lease obligations based upon payment terms as of
      June 30, 2008 are as follows:





2009
            
            $
            1,463,6902010
            
            
            166,8092011
            
            
            95,037Total
            
            $
            1,725,536





**9.** **Income
      Taxes**





The
      benefit from (provision for) income taxes consists of the
      following:


**Year Ended June 30,****2006**
              
              **2007**
              
              **2008**Current:Federal
              
              $
              —
              
              $
              —
              
              $
              —State
                  and local
              
              
              —
              
              
              —
              
              
              (66,950
              )Deferred:
              
              
              —
              
              
              —
              
              
              —State
                  and local
              
              
              —
              
              
              300,000
              
              
              102,000$
              —
              
              $
              300,000
              
              $
              35,050





A
      reconciliation of the statutory federal income tax rate to the effective rate
      is
      as follows:





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008**Federal
                income tax rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %State
                and local income taxes (net of federal benefit)
            
            
            —
            %
            
            1.1
            %
            
            0.1
            %Decrease
                (increase) of valuation allowance
            
            
            (48.4
            )%
            
            (33.4
            )%
            
            (33.5
            )%Reorganization
                costs
            
            
            (0.4
            )%
            
            (0.1
            )%
            
            —
            %Discount
                on related party debt acquisition
            
            
            —
            %
            
            —
            %
            
            —
            %Effect
                of change in rate utilized to compute deferred tax balances and deferred
                adjustments
            
            
            13.5
            %
            
            —
            %
            
            —
            %Other
            
            
            1.3
            %
            
            0.1
            %
            
            (0.7
            )%Effective
                tax rate
            
            
            0.0
            %
            
            1.7
            %
            
            (0.1
            )%


F-15




Deferred
      tax assets (liabilities) are comprised of the following:





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008**Deferred
                tax assets:Allowance
                for doubtful receivables
            
            $
            764,000
            
            $
            554,000
            
            $
            612,000Loss
                and tax credit carry forwards
            
            
            71,545,000
            
            
            72,346,000
            
            
            79,994,000Accrued
                expenses and other
            
            
            4,379,000
            
            
            4,294,000
            
            
            7,069,00076,688,000
            
            
            77,194,000
            
            
            87,675,000Deferred
                tax liabilities:Depreciation
            
            
            (15,061,000
            )
            
            (11,868,000
            )
            
            (8,102,000
            )Intangible
                assets
            
            
            (823,000
            )
            
            (271,000
            )
            
            (140,000
            )Forgiveness
                of indebtedness income
            
            
            (14,410,000
            )
            
            (14,410,000
            )
            
            (14,410,000
            )Other
            
            
            —
            
            
            (200,000
            )
            
            —(30,294,000
            )
            
            (26,749,000
            )
            
            (22,652,000
            )Net
                deferred tax asset
            
            
            46,394,000
            
            
            50,445,000
            
            
            65,023,000Valuation
                allowance
            
            
            (47,016,000
            )
            
            (50,767,000
            )
            
            (65,243,000
            )Deferred
                tax liabilities (net)
            
            $
            (622,000
            )
            $
            (322,000
            )
            $
            (220,000
            )





The
      Company had available, at June 30, 2008, net operating loss ("NOL") carry
      forwards for regular federal tax purposes of approximately $184 million (after
      the reduction described below) which expire during the years 2012 through 2027.
      As described in Note 3, on December 24, 2003, the Company's plan of
      reorganization became effective and the Company emerged from bankruptcy
      protection. As a result of the reorganization, for federal and state income
      tax
      purposes, approximately $92.8 million of indebtedness was considered
      cancelled. The cancellation and related transactions resulted in a reduction
      of
      its available net operating loss carry forwards of approximately
      $39.3 million, capital loss carry forwards of approximately
      $1.8 million and tax basis of its depreciable assets of $15.1 million
      and non-depreciable assets of $22.4 million. Further, should a change in
      ownership, as defined in Section 382 of the Internal Revenue Code occur,
      the Company's ability to utilize its remaining NOL in future years could be
      significantly limited.





**10.** **Related
      Party Transactions**





Upon
      the
      effectiveness of the Company’s plan of reorganization on December 24, 2003,
      AETG and AETC entered into a management services agreement, with
      GSCP, Inc., an affiliate of GSC, a principal stockholder of the AETG. Under
      the agreement, GSCP, Inc. agrees to advise and consult with our Board of
      Directors and management on certain business, operational and financial matters
      and provides other advisory services. The agreement provides that AETG and
      AETC
      will pay to GSCP, Inc. an annual fee of $500,000 for such services. The
      management services agreement terminates when GSC ceases to own any shares
      of
      common stock. The Company incurred advisory costs of $400,000 for the years
      ended June 30, 2006 and 2007 and $500,000 for the year ended June 30,
      2008.





On
      February 10, 2004, the Company entered into a management agreement with
      Atlantic Transit II Corp. ("ATC") and Atlantic School Bus Corp. ("ASBC"),
      subsidiaries of AETG. Under the agreement, the Company provided certain
      administrative services on behalf of ATC and ASBC. The agreement provided that
      ASBC will pay the Company a monthly fee of $30 per route vehicle. For the years
      ended June 30, 2006, 2007 and 2008 the company earned $56,520, $4,710 and
      $0, respectively. The assets of ASBC were sold in July of 2006 and this
      agreement has been terminated.





In
      connection with the Company entering into a Accounts Receivable Purchase and
      Sale Agreement with Wachovia, as amended, the President and Chief Executive
      Officer of the Company provided a personal guarantee in full support of the
      agreement, as required by Wachovia, for which he received guarantee fees
      totaling $175,000. The
      amended receivable agreement terminated on
      May
      15, 2007, when the Company amended and restated its existing senior credit
      facility with Wachovia.





AETC
      incurred a $50,000 fee for the year ended June 30, 2007 in connection with
      the
      guarantee issued by an affiliate for a surety bond.


F-16




**11.** **Equity**





In
      May
      2008, we issued 87,030 common shares, representing 8.4% of our then outstanding
      common shares, pursuant to the timely exercise of warrants which had been issued
      in connection with our previously outstanding 12% Senior Secured Notes due
      2008
      and Senior Secured Floating Rate Notes due 2008, and received aggregate proceeds
      of $870.30 as exercise price of such warrants. In July 2008, we issued 20,362
      common shares pursuant to the exercise of warrants which had been issued in
      connection with our previously outstanding third priority senior secured notes,
      and received aggregate proceeds of $203.62 as exercise price of such
      warrants.




**12.** **Commitments
      and Contingencies Leases**





Minimum
      rental commitments as of June 30, 2008 for non-cancelable equipment and
      real property operating leases are as follows:





**Year Ended June 30, 2008****Real**
              **Property**
            
            **Transportation and**
              **Other Equipment**
            
            **Total**2009
            
            $
            6,242,760
            
            $
            13,772,616
            
            $
            20,015,3762010
            
            
            5,285,608
            
            
            11,458,342
            
            
            16,743,9502011
            
            
            4,758,629
            
            
            6,963,012
            
            
            11,721,6412012
            
            
            3,969,808
            
            
            5,285,325
            
            
            9,255,1332013
            
            
            3,731,925
            
            
            3,985,839
            
            
            7,717,764Thereafter
            
            
            16,854,356
            
            
            3,093,348
            
            
            19,947,704$
            40,843,086
            
            $
            44,558,482
            
            $
            85,401,568





Total
      rental charges amounted to $16,009,791, $22,884,222, and $23,379,357 for the
      years ended June 30, 2006, 2007 and 2008, respectively.





In
      May
      2007, the Company bought out $12.1 million of vehicle operating leases.





**Litigation**





The
      Company is a defendant with respect to various claims involving accidents and
      other issues arising in the normal conduct of its business. Management and
      counsel believe the ultimate resolution of these matters will not have a
      material impact on the financial position or results of operations of AETC.
      There are various claims, which are insured under an automobile insurance policy
      issued by Reliance National Indemnity Company ("Reliance") for the period
      February 28, 1997 through December 31, 1998. Reliance is insolvent and
      as such the New York Public Motor Vehicle Liability Fund is required to provide
      coverage on claims arising in New York in lieu of Reliance. In May 2002,
      the New York State Insurance Department Liquidation Bureau notified the Company
      that this fund is financially strained and will be unable to provide defense
      or
      indemnification for claims, which arose during the Reliance policy period.
      The
      Company has commenced an action against the Superintendent of Insurance of
      New
      York to compel him to provide coverage, however, any related claims will be
      settled under the liabilities subject to compromise as a result of the
      reorganization.





**Environmental**





The
      Company is aware that certain properties and facilities it owns or operates
      may
      be subject to environmental remediation in the future due to the potential
      impact of asbestos contaminating material and offsite issues such as leaking
      underground storage tanks or previous or current industrial operations. In
      addition, the Company has received notices of violations and potential
      violations related to certain environmental matters. The Company hired an
      environmental consultant, who completed Phase I Environmental Site Assessments
      on approximately seven of the Company's properties. Based upon the reports
      of
      the environmental consultant, the Company believes that any penalty or
      remediation cost would not be material. In addition, the Company has recently
      settled two environmental claims for immaterial amounts. As a result, management
      and counsel do not believe that the penalties, if any, will be material.





**Outstanding
      Letters of Credit**





Letters
      of credit totaling approximately $9.3 million related to the collateralization
      of self insurance deductibles, worker's compensation insurance and automobile
      liability insurance loss funds and vehicle leases were outstanding as of
      June 30, 2007 and 2008, respectively.


F-17




**Performance
      Security**





AETC's
      transportation contracts generally provide for performance security in one
      or
      more of the following forms: performance bonds, letters of credit or cash
      retainages.





In
      most
      instances, AETC has opted to satisfy its security performance requirements
      by
      posting performance bonds. At June 30, 2007 and 2008 AETC has provided
      performance bonds aggregating approximately $33.9 million and $32.1
      million, respectively.





**Employment
      Agreements**




At
      June
      30, 2008, AETC has employment agreements with certain executives that require
      base salary payments of $803,565 and $317,253 in fiscal years 2009 and 2010,
      respectively.




Under
      an
      employment agreement dated April 18, 2007 with an executive, that executive
      receives in the event of a specified change of control of AETG or the Company,
      a
      cash exit bonus equal to 1.5% to 3.0% of the fair market value of the Company’s
      common shares on a fully diluted basis as of the date of such change of control.
      The exit bonus remains due and payable in the event a change in control occurs
      after the executive leaves the Company. There was no exit bonus accrued as
      of
      June 30, 2008.




The
      same
      executive received a performance bonus of $500,000 for 2006, in connection
      with
      the new New York City Department of Education (the “DOE”) extension
      agreement.




Under
      an
      employment agreement dated April 18, 2007 with another executive, that executive
      receives in the event of a specified change of control of AETG or the Company,
      a
      cash exit bonus equal to 1.5% to 3.0% of the
      fair
      market value of the Company’s common shares on a fully diluted basis as of the
      date
      of such change of control. The exit bonus remains due and payable in the event
      a
      change in control occurs after the executive leaves the Company. There was
      no
      exit bonus accrued as of June 30, 2008.




The
      same
      executive received a performance bonus of $40,000 for 2006, in connection with
      the new DOE extension agreement.




The
      Chairman of the Company has entered into an agreement with the major shareholder
      of AETG whereby that executive will receive a bonus that will be paid by that
      shareholder based upon the value that shareholder receives as a result of the
      sale of the Company.





**13.** **Retirement
      Plans**





AETC
      sponsors a tax qualified 401(k) plan whereby eligible employees can invest
      up to
      15% of base earnings subject to a specified maximum among several investment
      alternatives. An employer matching contribution up to a maximum of 2.5% of
      the
      employee's compensation is also invested. AETC's contributions were
      approximately $384,000, $385,000 and $404,000 for the years ended June 30,
      2006, 2007 and 2008, respectively.





AETC
      has
      a qualified Profit Sharing Plan for eligible employees (primarily drivers,
      mechanics and escorts not covered by union deferred compensation plans). AETC's
      contributions are based upon hours worked. Participants are not allowed to
      make
      deferred contributions. AETC's contributions were approximately $84,000, $82,000
      and $79,000 for the years ended June 30, 2006, 2007 and 2008,
      respectively.





The
      Company contributed to the pension plans of various unions covering drivers,
      mechanics and other workers as part of related union agreements. Such
      contributions were approximately $6,924,000, $7,371,000 and $7,753,000 for
      the
      years ended June 30, 2006, 2007 and 2008, respectively.





**14.** **Major
      Customer and Concentration of Credit Risk**





For
      the
      years ended June 30, 2006, 2007 and 2008, revenues derived from the DOE
      were the following:





**Year Ended June 30,****2006**
            
            **2007**
            
            **2008**Total
                revenues from operations
            
            $
            414,058,068
            
            $
            428,817,213
            
            $
            433,527,623DOE
                revenues—$
            
            
            211,565,437
            
            
            230,907,630
            
            
            231,086,145DOE
                revenues—%
            
            
            51.10
            %
            
            53.85
            %
            
            53.30
            %




F-18




As
      of
      June 30, 2007 and June 30, 2008, AETC had accounts receivable from the DOE
      of $22,439,826 and $19,362,393, respectively.





At
      June 30, 2007 and 2008, substantially all cash and cash equivalents were on
      deposit with one major financial institution. Deposits held with banks may
      exceed the amounts of insurance provided on such deposits.





Approximately
      81% of the Company's employees are subject to 31 collective bargaining
      agreements that either will have or will expire over the next five
      years.





**15.** **Sales
      and Leaseback Transactions**




On
      July 6, 2005, 201 West Sotello Realty Inc., a subsidiary of the Company,
      completed the sale and leaseback of its owned real property located in Los
      Angeles, California.  The sale and lease back was pursuant to the Agreement
      and Escrow Instructions for Purchase of Real Estate (the “Agreement and Escrow
      Instructions”) with S.R. Partners (the “Buyer”).  Pursuant to the Agreement
      and Escrow Instructions, 201 West Sotello Realty Inc. sold to the Buyer its
      owned real property located in Los Angeles, California for a gross purchase
      price of $5,000,000.  In connection with the sale of the property, Atlantic
      Express of L.A. Inc., a subsidiary of the Company, agreed to leaseback the
      premises from the Buyer for a term of approximately ten years.  The triple
      net lease called for a monthly payment of $39,583 with annual increments of
      2.5%.  Atlantic Express of L.A. Inc. is responsible for all real property
      taxes and certain insurance costs under the lease. The
      gain
      on this transaction was $737,268 and is being amortized over the leaseback
      period on a straight-line basis.





On
      January 11, 2006, Midway Leasing, Inc. (“Midway”), a subsidiary of the
      Company, completed the sale and leaseback of its owned real property located
      in
      Staten Island, New York. Pursuant to the Contract of Sale, Midway sold to the
      purchaser its owned real property in Staten Island, New York for a gross
      purchase price of $4,200,000.  In connection with the sale of the real
      property, the Company agreed to leaseback the premises from the purchaser for
      a
      term of 10 years.  The lease calls for monthly payments of $29,750 with
      annual increases of 2.0%. The Company will be responsible for all real property
      taxes, certain insurance costs and utilities.  The Company incurred a loss
      on the sale of approximately $0.9 million.





**16.** **Sale
      of Business**




On
      July
      27, 2006, T-NT Bus Service, Inc., a subsidiary of the Company (“T-NT”),
      completed the sale of substantially all of its assets for a gross purchase
      price
      of $12.6 million. In addition, Domenic Gatto, the Company’s Chief Executive
      Officer and President received $100,000 as consideration for entering into
      a
      five year non-competition agreement. The Company recognized a gain on the sale
      of these assets of approximately $5.6 million, net for the year ended June
      30,
      2007, which is included in gain from discontinued operations. Revenues from
      T-NT
      were 2.3% of total revenue and income (loss) before taxes represented 1.0%
      for
      the year ended June 30, 2006. Due to immateriality, these operations were not
      presented as discontinued operations for the year.





**17.** **Insurance
      Collateral Requirements**




In
      December 2006, one of the Company’s insurance carriers released approximately
      $10.0 million in excess collateral based upon retrospective adjustments for
      various years. Approximately $5.2 million was a credit issued to the Company
      and
      $4.8 million was a reduction in a letter of credit held by the insurance
      company. This letter of credit was collateralized by restricted cash which
      became available for working capital. The transaction had no effect on the
      Company’s consolidated statements of operations and has no impact on future
      insurance expense.





In
      December 2007, one of the Company’s insurance carriers issued us approximately
      $9.0 million in credits, representing retrospective adjustments for various
      years, by offsetting approximately $2.2 million of current premiums due in
      January 2008, returning funds of $6.0 million and adding $0.8 million to our
      cash collateral account. In addition, the insurance company did not renew a
      $0.7
      million letter of credit held as collateral. This letter of credit was
      collateralized by restricted cash which became available for working capital.
      The transaction had no effect on the Company’s consolidated statements of
      operations and has no impact on future insurance expense.


F-19





**18.** **Segment
      Information**





The
      operating segments reported below are segments of the Company for which separate
      financial information is available and for which operating results as measured
      by income from operations are evaluated regularly by executive management in
      deciding how to allocate resources and in assessing performance. The accounting
      policies of the business segments are the same as those described in the Summary
      of Significant Accounting Policies (see Note 1).





The
      Company operates in two reportable segments: School Bus Operations and
      Paratransit and Transit Operations, both of which are conducted throughout
      the
      U.S.





School
      Bus Operations provide services for the transportation of open enrollment
      students through the use of standard school buses, and the transportation of
      physically or mentally challenged students through the use of an assortment
      of
      vehicles, including standard school buses, passenger vans and lift-gate
      vehicles, which are capable of accommodating wheelchair-bound
      students.





Paratransit
      and Transit Operations provide paratransit service in New York for physically
      and mentally challenged persons who are unable to use standard public
      transportation. The remainder of our paratransit and transit operations revenue
      comes from fixed route transit, express commuter line and charter and tour
      bus
      services.





The
      summarized segment information (excluding discontinued operations), as of and
      for the years ended June 30, 2006, 2007 and 2008 are as
      follows:





**Year Ended June 30, 2006****School Bus**
              **Operations**
            
            **Paratransit**
              **and Transit**
              **Operations**
            
            **Total**Revenues
            
            $
            368,065,542
            
            $
            45,992,526
            
            $
            414,058,068Cost
                of operations
            
            
            330,738,418
            
            
            39,504,296
            
            
            370,242,714Income
                (loss) from operations
            
            
            (5,944,684
            )
            
            2,505,294
            
            
            (3,439,390
            )Total
                assets
            
            
            202,371,791
            
            
            11,154,414
            
            
            213,426,205Capital
                expenditures
            
            
            5,883,920
            
            
            649,186
            
            
            6,533,106Depreciation
                and amortization
            
            
            26,563,349
            
            
            1,635,979
            
            
            28,199,328








**Year Ended June 30, 2007****School Bus**
              **Operations**
            
            **Paratransit**
              **and Transit**
              **Operations**
            
            **Total**Revenues
            
            $
            381,968,329
            
            $
            46,848,884
            
            $
            428,817,213Cost
                of operations
            
            
            338,913,983
            
            
            41,618,775
            
            
            380,532,758Income
                from operations
            
            
            10,363,519
            
            
            966,139
            
            
            11,329,658Total
                assets
            
            
            190,187,233
            
            
            16,538,617
            
            
            206,725,850Capital
                expenditures
            
            
            16,790,050
            
            
            1,446,594
            
            
            18,236,644Depreciation
                and amortization
            
            
            17,655,526
            
            
            1,437,957
            
            
            19,093,483








**Year Ended June 30, 2008****School Bus**
              **Operations**
            
            **Paratransit**
              **and Transit**
              **Operations**
            
            **Total**Revenues
            
            $
            386,297,298
            
            $
            47,230,325
            
            $
            433,527,623Cost
                of operations
            
            
            355,682,088
            
            
            41,922,704
            
            
            397,604,792Income
                (loss) from operations
            
            
            (2,292,717
            )
            
            1,119,311
            
            
            (1,173,406
            )Total
                assets
            
            
            163,799,650
            
            
            16,254,097
            
            
            180,053,747Capital
                expenditures
            
            
            8,330,327
            
            
            2,458,310
            
            
            10,788,637Depreciation
                and amortization
            
            
            17,575,926
            
            
            1,448,661
            
            
            19,024,587


F-20




**Years Ended June 30****Reconciliation to net income (loss)**
            
            **2006**
            
            **2007**
            
            **2008****(In thousands)**Income
                (loss) from operations
            
            $
            (3,439
            )
            $
            11,330
            
            $
            (1,173
            )Interest
                expense
            
            
            (25,941
            )
            
            (34,759
            )
            
            (33,349
            )Reorganization
                costs
            
            
            (569
            )
            
            (80
            )
            
            (82
            )Other
            
            
            400
            
            
            492
            
            
            210Loss
                before benefit from income taxes and discontinued
                operations
            
            $
            (29,549
            )
            $
            (23,017
            )
            $
            (34,394
            )




**19.     Supplemental
      Financial Information**




AETC
      has no independent assets or operations, the guarantees of the Notes are full
      and unconditional and joint and several, and any subsidiaries of AETC other
      than
      the subsidiary guarantors are minor, in accordance with Rule 3-10 of
      Regulation S-X.




**20.** **Valuation
      Allowances**





**Balance at**
              **Beginning**
              **of Period**
            
            **Additions-**
              **Charged to**
              **Costs and**
              **Expenses**
            
            **Deductions**
            
            **Balance at**
              **End of**
              **Period**Year
                Ended June 30, 2006:Allowance
                for doubtful accounts (1)
            
            
            1,704,849
            
            
            120,000
            
            
            64,539
            
            
            1,760,310Valuation
                allowance for deferred taxes (2)
            
            
            32,717,000
            
            
            14,299,000
            
            
            —
            
            
            47,016,000Year
                Ended June 30, 2007:Allowance
                for doubtful accounts (1)
            
            
            1,760,310
            
            
            120,000
            
            
            603,083
            
            
            1,277,227Valuation
                allowance for deferred taxes (2)
            
            
            47,016,000
            
            
            3,751,000
            
            
            —
            
            
            50,767,000Year
                Ended June 30, 2008:Allowance
                for doubtful accounts (1)
            
            
            1,277,227
            
            
            420,000
            
            
            287,350
            
            
            1,409,877Valuation
                allowance for deferred taxes (2)
            
            
            50,767,000
            
            
            14,476,000
            
            
            —
            
            
            65,243,000





(1)  Deductions
      from allowances represent losses or expenses for which the respective allowances
      were created. In the case of the allowances for doubtful accounts, such
      deductions are reduced by recoveries of amounts previously written
      off.





(2)  Adjustments
      associated with the Company's assessment of the deferred tax assets.


F-21


**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 26, 2008.





Atlantic
              Express Transportation Corp.By:
            /s/
                Nathan SchlenkerNathan
                SchlenkerChief
                Financial Officer(Principal
                Financial and Accounting Officer)





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by each of the following persons on behalf of the Registrant and in
      the
      capacities indicated on September 26, 2008.





**SIGNATURE**
            **TITLE**/s/ Peter Frank
            Chairman of the Board of DirectorsPeter Frank/s/ Domenic Gatto
            Director, Chief Executive Officer and PresidentDomenic Gatto
            (Principal Executive Officer)/s/ Mathew Kaufman
            DirectorMatthew Kaufman/s/ Adam Draizin
            DirectorAdam Draizin/s/ Nathan Schlenker
            Chief Financial OfficerNathan Schlenker
            (Principal Financial and Accounting Officer)