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SECURITIESAND EXCHANGE COMMISSION

Washington, D.C.20549

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Form10-K

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|   | ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the fiscal year ended June30,2006

OR

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|   | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 |

For the transition periodfrom                        to                        

Commissionfile number 0-24247

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ATLANTICEXPRESS TRANSPORTATION CORP.

(Exact nameof Registrant as specified in its charter)

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| NewYork                                                       |  |  |  |  | 13-392-4567 |  |
| (State or other jurisdiction of incorporation ororganization) |  |  | (I.R.S.Employer Identification No.) |
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7North StreetStaten Island, New York 10302(718)442-7000

(Address, including zipcode, and telephone number, including area code,ofRegistrant’s principal executiveoffices)

Securities Registered Pursuantto Section 12(b) of theAct:

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| Titleof EachClass |  |  | Nameof Each Exchange on WhichRegistered |
| None              |  |  | None                                    |
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SecuritiesRegistered Pursuant to Section 12(g) of theAct:

None

Indicate by check markwhether the Registrant is well-known seasoned issuer, as defined inrule 405 of the Securities Act. Yes        No   

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

Indicate by check markwhether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes       No    

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.    

Indicate by checkmark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (as defined in Rule12b-2 of the Exchange Act).

Large accelerated filer                   Accelerated filer                   Non-acceleratedfiler        

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes        No   

The aggregate market value of voting andnon-voting equity held by non-affiliates of the Registrant onSeptember  28,  2006 was$0.

ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PAST FIVE YEARS

Indicate bycheck mark whether the Registrant has filed all documents and reportsrequired to be filed by Section 12, 13, or 15(d) of the Securities andExchange Act of 1934 subsequent to the distribution of securities undera plan confirmed by a court. Yes        No   

APPLICABLE ONLY TO CORPORATEREGISTRANTS

The number of outstanding shares of theRegistrant’s common stock, $0.01 par value, as ofSeptember  28,  2006 was945,263.

DOCUMENTS INCORPORATED BYREFERENCE

None

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PART1

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| Item1.  | Business. |

Overview

We areAtlantic Express Transportation Corp., a New York corporation. In thisdocument, we refer to ourselves as (the‘‘Company’’,‘‘we’’, ‘‘us’’,‘‘our’’.) We are the fourth largestprovider of school bus transportation in the United States and theleading provider in New York City, the largest market in which weoperate. We also provide paratransit services for physically andmentally challenged passengers to public transit systems, and we offerfixed route transit, express commuter line and charter and tour busservices.

We have been in operation for over 35 years andhave grown from a small local bus company with a fleet of 16 buses toone of the largest national school bus transportation companies in thecountry with a fleet of approximately 6,000 vehicles as of June30,  2006. We were founded in 1968 as a school bus company basedin Staten Island, New York. Domenic Gatto, our Chief Executive Officerand President, commenced employment with us in 1973 and purchased ourcompany in 1974, at which time we operated only 16 buses. In 1979, wewere awarded two major school bus transportation contracts by the NewYork City Department of Education (the‘‘DOE’’), which substantially increased ourrevenues. These contracts, which were originally awarded for a periodof three years, have been extended successively through June 30,2010. From 1982 to 1987, we strengthened our presence in New York Citythrough the acquisition of 14 regional school bus transportationcompanies. In 1986, we won and purchased additional contracts in NewYork City, which also have been extended successively throughJune 30, 2010. From 1986 to 1989, we further strengthened ourpresence in New York City through the acquisitions of four localcontractors and expanded our operations to Nassau and Suffolk countieson Long Island, New York, through a combination of acquisitions andwinning new contracts. From 1990 to 1997, we consummated six additionalacquisitions in the New York metropolitan area and three acquisitionson Long Island, New York. In addition to our expansion in the New Yorkgreater metropolitan area, we extended our operations to Philadelphiain 1993, where we were the successful bidder for a new contract, andmade subsequent acquisitions in 1993 and won additional new contractsin 1996 and 1997. We also established operations in St. Louis in 1995and in Los Angeles in 1997 by winning contracts. We have acquired over20 companies in the last 15 years. We have not made any materialacquisitions in the past five years. We have sold the remaining assetsof and have closed our bus sales operations in September  2004.We have treated this as discontinued operations for all periodspresented, which we consider to be non-core businesses.

We havefocused on developing our favorable reputation in the areas ofpassenger safety, timeliness and quality of service, key factors usedby school bus transportation administrators in selecting and renewingour services. We believe the expertise we have gained in our longoperating history enables us to establish strong relationships with ourcustomers and provides us with a competitive advantage when renewingcontracts or bidding on new business. Customers representingapproximately 98% of our fiscal year 2006 contract revenue fromcontinuing operations have been with us for over five years.

OnOctober 27, 1998, the holders of a majority in principal amountof our then outstanding 103⁄4% senior securednotes due 2004 consented to an amendment to the indenture governingthose notes, and on November 4, 1998, GSCP II Holdings (AE),LLC, an affiliate of Greenwich Street Capital(‘‘GSC’’), acquired an approximately83% equity interest in our recapitalized parent, AtlanticExpress Transportation Group, Inc. or(‘‘AETG’’), which owned all of the issuedand outstanding shares of our capital stock at that time.

Wegenerated revenues from continuing operations of $414.1 millionfor the fiscal year ended June 30, 2006 and incurred a net lossof $29.6  million.

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Recent Transactions

Certain of therecent transactions discussed below occurred after June30,  2006, the end of the fiscal year covered by this Form 10-K.Nevertheless, the discussion has been included to provide a morecomplete description of the business of the company as of the date ofthe filing of this Form 10-K.

New school buscontracts.    In June  2005, the DOE extended all of theCompany’s contracts with the DOE for an additional five yearsending June  30,  2010. These contracts representedapproximately 57.0% of all the school bus operation revenues forthe fiscal year ended June  30,  2006.

On July27,  2006, T-NT Bus Service, Inc.(‘‘T-NT’’), a subsidiary of the Company,completed the sale of substantially all of its assets. Pursuant to theContract of Sale, T-NT sold substantially all of its assets for a grosspurchase price of $12.6  million. In addition, Domenic Gatto, theCompany’s Chief Executive Officer and President, received$100,000 as consideration for entering into a five-year non-competitionagreement. The Company will recognize a gain on the sale of theseassets of $5.8  million in the first quarter of fiscal year2007.

On September  19,  2006, our senior lenderapproved the extension of our senior credit facility to February29,  2008. The last twelve months(‘‘LTM’’) earnings before interest, incometaxes, depreciation and amortization(‘‘EBITDA’’) covenant was increased to$24.0  million effective April  2007, $25.0  millioneffective May  2007 and $26.0  million effectiveJune  30,  2007 and thereafter. In addition, the seniorlender approved an increase in the revolving line of credit by$10.0  million effective September  25,  2007.

On September  21,  2006 the holder of the $4.9million senior unsecured note approved an extension in the maturitydate of the note from April  23,  2007 to February22,  2008.

Business Operations

We derive ourrevenue from two segments: (for additional segment information see Note21 of the notes to Consolidated Financial Statements included elsewherein this Form 10-K)

School Bus Operations (88.9% ofrevenues from continuing operations for the year ended June30,  2006)

We have contracts to provide school bustransportation in 126 school districts in New York, Missouri,Massachusetts, California, Pennsylvania, New Jersey andIllinois. We generally provide services for the transportation of openenrollment students through the use of standard school buses, and thetransportation of physically or mentally challenged(‘‘Special Education’’) students throughthe use of an assortment of vehicles, including standard school buses,passenger vans and lift-gate vehicles, which are capable ofaccommodating wheelchair-bound students. As of June  30,2006, we had a fleet of approximately 5,600 vehicles to service ourschool bus operations, consisting of school buses, minivans and cars,lift and ramp-equipped vehicles, coaches and service and supportvehicles.

Services.    We generally provide servicesfor transportation of open enrollment (‘‘RegularEducation’’) students through the use of standard schoolbuses, and transportation Special Education students through the use ofan assortment of vehicles, including standard school buses, passengervans and lift-gate vehicles, which are capable of accommodatingwheelchair bound students. In most jurisdictions serviced by us,escorts are required to accompany drivers on Special Educationvehicles.

Contracts.    Our school bus transportationcontracts are awarded by school districts through a public bidding orrequest for proposal (‘‘RFP’’) process. Ourschool bus transportation contracts have provided a relativelypredictable and stable stream of revenues over their terms, whichinitially range from one to five years. Compensation under school bustransportation contracts is generally based upon a daily rate pervehicle, which is established either by public bidding or by proposaland negotiation with respect to RFP contracts. Contracts in New YorkCity provide for the payment of the daily vehicle rate for days ofscheduled performance in accordance with the school calendar andprovide for payment of 85% of the daily rate for any vehicle notused due to school cancellations on any scheduled school day. Dailyvehicle rates earned under contract renewals are generally increased

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from previous rates by application of theConsumer Price Index. Our cost increases have in the past and could inthe future outpace such revenue increases. The number of vehiclesrequired is determined by the school districts, initially pursuant totheir bid specifications and/or RFP, and is subject to change.

Our school bus transportation contracts generally provide forperformance security in one or more of the following forms: performancebonds, letters of credit and cash retainages. In most other instanceswe have opted to satisfy our security performance requirements byposting performance bonds.

Customers.    We havelongstanding relationships with many of the school districts that weservice. School districts with which we do business generally appoint abusiness manager and/or transportation supervisor to oversee school bustransportation operations. Larger school districts have separatebureaus or divisions, which regulate and supervise the provision ofschool bus transportation services. Passenger safety, timeliness andquality of service are among the factors used by school bustransportation administrators to evaluate us.

In our experience,unless a school district is dissatisfied with the services of a schoolbus transportation contractor, school districts tend to extend existingcontracts rather than solicit bids from potential replacementcontractors, unless applicable law or the terms of the contractotherwise require. We believe that replacing an existing contractorthrough a bidding process generally has resulted in higher prices todistricts than contract extensions because of the significant start-upcosts that a replacement contractor faces. Bidding also exposes aschool district to uncertainty in the quality of service that would beprovided by a new contractor.

Historically, school districtsawarded school bus transportation contracts through a public biddingprocess by which such contracts were required to be awarded to thelowest responsible bidder, without regard to quality of service.However, management believes that, due in part to the poor performanceof certain low-priced school bus transportation contractors, schooldistricts will increasingly rely on a RFP process, which enables schooladministrators to broaden the factors considered when awarding acontract. Factors such as passenger safety, timeliness and quality ofservice, among others, are generally considered under the RFP process.In 1996, the State of New York (where we have our largest concentrationof school bus transportation contracts) adopted legislation, which, forthe first time, permitted school districts in the State of New York toselect school bus transportation contractors through a RFP process. Webelieve that because of the reputation we have developed in the schoolbus transportation industry, we are well positioned to obtain contractsthat are awarded by the RFP process as well as by public bidding. TheDOE accounted for 51.1%, 44.2% and 42.7% of ourrevenues from continuing operations in fiscal year 2006, 2005 and 2004,respectively. No other customer contributed greater than 3.7% ofour revenues from continuing operations during these periods.

Most of the DOE contracts were originally awarded to us in 1979 andhave been renewed and extended since then. The latest extensionoccurred in June  2005 and extended the contracts throughJune 30, 2010. Although the DOE has the option to reduce ourroutes at will, the DOE, since the inception of the first contract, hasoften increased the number of routes but has never substantiallyreduced them. Our ability to generate cash flow is heavily dependent onour contracts with the DOE, and we expect it to continue to be in thefuture.

Paratransit and Transit Operations (11.1% ofrevenues from continuing operations for the year ended June30,  2006)

For fiscal year 2006, we have one contractto provide paratransit service in New York City for physically andmentally challenged persons who are unable to use standard publictransportation. The remainder of our paratransit and transit operationsrevenue comes from fixed route transit, express commuter lines andcharter and tour bus services. This division is primarily dependant onour Metropolitan Transit Authority(‘‘MTA’’) contract which will expire inDecember  2008. As of June  30,  2006, we had a fleetof approximately 400 vehicles to service our paratransit and transitoperations for fiscal year 2006.

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To enhance passenger safety and to satisfyparatransit contract requirements, we have instituted a comprehensivedriver-training course, which encompasses defensive driving, passengersensitivity, first aid and CPR procedures, passenger assistancetechniques and detailed information about the disabilities of thepassengers that we transport. Paratransit services are primarily fundedby public transit systems.

Services.    Ourparatransit services are rendered based upon advance call-in requestsfor transportation, which are primarily scheduled by an independentthird party. The paratransit services operation has developed asubstantial degree of expertise in developing and providingtransportation services required by our physically or mentallychallenged passengers.

Contract.    The term of ourparatransit contract is for five years. In paratransit and transitoperations, the scope of services and contract requirements varyconsiderably from one jurisdiction to another. The three generalcomponents of paratransit transportation services are(1) providing the actual transportation service,(2) reserving passenger requests for service and(3) sorting and scheduling passenger requests for service. Somecustomers require all three components of service while other customersperform one or more of such functions themselves or through thirdparties. Paratransit vehicles are generally provided by the transitagency. We are generally entitled to a specified charge per hour ofvehicle service together with other fixed charges. Paratransit userspay a fixed amount per trip determined by the local transit systemgovernmental entity (which may be equal to or based upon prevailingpublic transportation fees in the jurisdiction in question), which iscredited against the monthly contract price due from the local transitsystem.

Seasonality

The school bus transportationoperation, which accounted for approximately 88.0% of ourrevenues from continuing operations for each of the last three fiscalyears, is seasonal in nature and generally follows the pattern of theschool year, with sustained levels of business during the months ofSeptember through June. As a result, we have experienced, and expect tocontinue to experience, a substantial decline in revenues from lateJune through early September. Our quarterly operating results have alsofluctuated due to a variety of factors, including variation in thenumber of school days in each quarter (which is affected by the timingof the first and last days of the school year, holidays, the month inwhich spring break occurs and adverse weather conditions, which canclose schools) and the profitability of our other operations. Inparticular, historically we have generated operating losses during thefirst quarter of each fiscal year. Consequently, interim results arenot necessarily indicative of the full fiscal year and quarterlyresults may vary substantially, both within a fiscal year and betweencomparable fiscal years. See ‘‘Management'sDiscussion and Analysis of Financial Condition and Results ofOperations.’’

Focus on Passenger Safety andService

Management has developed a corporate culture focused onpassenger safety and service. All drivers are required to attendperiodic safety workshops and training programs, which emphasizedefensive driving and courteous behavior. We attempt to buy schoolbuses which comply with New York State safety regulations, among themost stringent in the country, which allows us to give our customersthe benefit of the safety features and gives us flexibility in movingor selling vehicles in our fleet to transportation operators in otherstates as well. We believe that our emphasis on passenger safety andservice provides us with a competitive advantage and is a majorcontributor to our success in extending existing contracts and winningnew contracts.

Fleet Management and Maintenance

As ofJune  30,  2006, we operated a fleet of approximately 6,000vehicles. The average age of our fleet, exclusive of 305 vehiclesprovided by various transportation authorities as of that date, was8.5 years.

As of June  30,  2006, the fleetwas maintained by our trained mechanics at our 58 facilities. We have acomprehensive preventive maintenance program for our equipment tominimize equipment 

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down time and prolong equipment life. Programsimplemented by us include standard maintenance, regular safety checks,lubrication, wheel alignments and oil and filter changes, all of whichare performed on a regularly scheduled basis by our mechanics.

The following is a breakdown of our fleet of owned vehicles as ofJune  30,  2006 by age:

|                          |  |  |             |  |       |                 |  |  |                           |  |     |         |  |  |                            |  |     |       |  |  |  |  |    |  |  |  |  |  |     |  |  |  |  |  |       |  |
|--------------------------|--|--|-------------|--|-------|-----------------|--|--|---------------------------|--|-----|---------|--|--|----------------------------|--|-----|-------|--|--|--|--|----|--|--|--|--|--|-----|--|--|--|--|--|-------|--|
|                     |  |  | SchoolBuses |  |       | MinivansAndCars |  |  | Lift/RampEquippedVehicles |  |     | Coaches |  |  | ServiceandSupport Vehicles |  |     | Total |
| Lessthan 2 yearsold |  |  |             |  | 24    |                 |  |  |                           |  | 0   |         |  |  |                            |  | 0   |       |  |  |  |  | 3  |  |  |  |  |  | 4   |  |  |  |  |  | 31    |  |
| 2-5 yearsold        |  |  |             |  | 296   |                 |  |  |                           |  | 62  |         |  |  |                            |  | 44  |       |  |  |  |  | 0  |  |  |  |  |  | 14  |  |  |  |  |  | 416   |  |
| 6-10 yearsold       |  |  |             |  | 2,134 |                 |  |  |                           |  | 101 |         |  |  |                            |  | 280 |       |  |  |  |  | 8  |  |  |  |  |  | 56  |  |  |  |  |  | 2,579 |  |
| 11-15 yearsold      |  |  |             |  | 1,034 |                 |  |  |                           |  | 1   |         |  |  |                            |  | 97  |       |  |  |  |  | 7  |  |  |  |  |  | 63  |  |  |  |  |  | 1,202 |  |
| Greaterthan15 years |  |  |             |  | 678   |                 |  |  |                           |  | 2   |         |  |  |                            |  | 49  |       |  |  |  |  | 11 |  |  |  |  |  | 12  |  |  |  |  |  | 750   |  |
| Total                    |  |  |             |  | 4,166 |                 |  |  |                           |  | 164 |         |  |  |                            |  | 470 |       |  |  |  |  | 29 |  |  |  |  |  | 149 |  |  |  |  |  | 4,978 |  |
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Thefollowing is a breakdown of our fleet of leased vehicles as ofJune  30,  2006 by age:

|                          |  |  |             |  |     |                 |  |  |                           |  |     |         |  |  |                            |  |    |       |  |  |  |  |    |  |  |  |  |  |   |  |  |  |  |  |     |  |
|--------------------------|--|--|-------------|--|-----|-----------------|--|--|---------------------------|--|-----|---------|--|--|----------------------------|--|----|-------|--|--|--|--|----|--|--|--|--|--|---|--|--|--|--|--|-----|--|
|                     |  |  | SchoolBuses |  |     | MinivansAndCars |  |  | Lift/RampEquippedVehicles |  |     | Coaches |  |  | ServiceandSupport Vehicles |  |    | Total |
| Lessthan 2 yearsold |  |  |             |  | 393 |                 |  |  |                           |  | 120 |         |  |  |                            |  | 52 |       |  |  |  |  | 4  |  |  |  |  |  | 1 |  |  |  |  |  | 570 |  |
| 2-5 yearsold        |  |  |             |  | 45  |                 |  |  |                           |  | 0   |         |  |  |                            |  | 7  |       |  |  |  |  | 7  |  |  |  |  |  | 0 |  |  |  |  |  | 59  |  |
| 6-10 yearsold       |  |  |             |  | 50  |                 |  |  |                           |  | 0   |         |  |  |                            |  | 2  |       |  |  |  |  | 23 |  |  |  |  |  | 0 |  |  |  |  |  | 75  |  |
| 11-15 yearsold      |  |  |             |  | 10  |                 |  |  |                           |  | 0   |         |  |  |                            |  | 0  |       |  |  |  |  | 3  |  |  |  |  |  | 0 |  |  |  |  |  | 13  |  |
| Greaterthan15 years |  |  |             |  | 0   |                 |  |  |                           |  | 0   |         |  |  |                            |  | 0  |       |  |  |  |  | 0  |  |  |  |  |  | 0 |  |  |  |  |  | 0   |  |
| Total                    |  |  |             |  | 498 |                 |  |  |                           |  | 120 |         |  |  |                            |  | 61 |       |  |  |  |  | 37 |  |  |  |  |  | 1 |  |  |  |  |  | 717 |  |
|                          |

Inaddition to the vehicles in the tables above, as of June30,  2006, we operated 305 vehicles provided by varioustransportation authorities pursuant to their respective contracts.

Employees

As of June  30,  2006, we hadapproximately 8,100 employees to provide transportation services,consisting of approximately 5,700 drivers, 1,500 escorts and 500maintenance workers. In addition, there were approximately 400employees in executive, operations, clerical and sales functions. Ourschool bus drivers and escorts are required to undergo backgroundchecks, drug and alcohol testing and fingerprinting as a condition foremployment on school buses. All drivers are licensed to drive schoolbuses and/or motor coaches in accordance with federal and statelicensing requirements.

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

As of June30,  2006, approximately 77% of our employees were membersof various labor unions. We were party to thirty collective bargainingagreements, of which four agreements excluding Local 1181 of theAmalgamated Transit Union (‘‘Local 1181’’),covering approximately 340 employees, have already expired, eightagreements, covering approximately 2,150 employees, will expire overthe next two years, with the remainder to expire over the next three tofive years. The labor contract with Local 1181 covering drivers,escorts and shop personnel expired June  30,  2006 and wasrenewed for three years in July  2006. We believe that ourrelations with employees are satisfactory. As of 

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June  30,  2006, approximately55% of the Company’s union employees were represented byLocal 1181, which primarily represents personnel rendering services onbehalf of the DOE. Labor agreements with Local 1181 requirecontributions to the Local 1181 welfare fund and pension plan on behalfof drivers, mechanics and certain escorts. All contracts awarded by theDOE during the past 24 years contain employee protectionprovisions and require continued contributions to the Local 1181pension plan and welfare fund for rehired employees opting to remain insuch plan and such fund. Pursuant to a plan amendment approved by thePension Benefit Guaranty Corporation, withdrawal liability forcontributing employers to the plan, such as our company, is essentiallyeliminated, provided that withdrawal is based upon the loss of DOEcontracts and that the successor contractor becomes a contributingemployer to the plan.

Competition

The school bustransportation industry and paratransit services industry are highlycompetitive. We compete on the basis of our reputation for passengersafety, quality of service and price. We believe we are competitive ineach of these areas. Contracts are generally awarded pursuant to publicbidding, where price is the primary criteria for a contract award. Wehave many competitors in the school bus and paratransit transportationbusiness; including transportation companies with resources andfacilities substantially greater than those of ours. We compete withLaidlaw Transit, Inc., a division of LaidlawInternational Inc., the largest private transportationcontractor in North America, First Transit and First Student, divisionsof First Group America, Inc., the second largest privatetransportation contractor in North America, and National ExpressCorporation, in addition to other regional and local companies.

Risk Management and Insurance

We maintain various forms ofliability insurance against claims made by third parties for bodilyinjury or property damage resulting from operations. Such insuranceconsists of (1) general liability insurance of$1.0 million per occurrence with a $50,000 deductible againstclaims arising from other (e.g., non-vehicle) liability exposure and(2) our present primary $1 million vehicle liabilitypolicy, which covers all our vehicles except those providing service tothe New York City Transit Authority (the‘‘T.A.’’), the DOE, and our Massachusettsoperations.

Under our primary vehicle liability policy, we payfronting charges to our insurance carrier and we are required tocontribute to a loss fund. The carrier pays the first $500,000 peroccurrence from this loss fund, up to a maximum amount determined foreach policy period. We are entitled to obtain a refund from the carrierbased upon a calculation of ratable losses valued as of a date 42 to54 months after the effective date of the policy. The carrier isrequired to pay for all losses in excess of $500,000, up to$1 million, per occurrence and any excess of the aggregatemaximum ratable losses agreed to for that policy period. The T.A.provides $3 million insurance per occurrence for our T.A.vehicles. The DOE provides $1 million insurance per occurrencefor our DOE vehicles, for which they deduct an agreed upon amount fromour monthly invoices. Our Massachusetts vehicles are covered undervarious ‘‘First Dollar’’ policies with nodeductibles. In addition, we cover all of our vehicles with anadditional umbrella policy of a minimum of $10  million peroccurrence, with an aggregate self-insured retention of $3,000,000.Beyond the occurrence limits mentioned herein, the vehicle liabilitycoverage provides indemnity for an unlimited number of occurrences. Ourinsurance policies generally provide coverage for a one-year term andtherefore, are generally subject to annual renewal.

Under ourworkers' compensation insurance policy, we pay fronting chargesto our insurance carrier and we are required to contribute to a lossfund. The carrier pays the first $500,000 per occurrence from this lossfund, up to a maximum amount determined for each policy period. We areentitled to obtain a refund from the carrier based upon a calculationof ratable losses valued as of a date 42 to 54 months after theeffective date of the policy. The carrier is required to pay for alllosses in excess of $500,000, up to $1 million, per occurrenceand any excess of the aggregate maximum ratable losses agreed to forthat policy period.

In the past, we self-insured ourworkers' compensation deductibles through Atlantic North CasualtyCompany, a wholly owned captive insurance company chartered in Vermont,which was not a 

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guarantor of our outstanding 12% SeniorSecured Notes, due 2008 and Senior Secured Floating Rate Notes due 2008(collectively the ‘‘Notes’’). AtlanticNorth Casualty Company's total claims liability were partiallyfunded by premiums charged to operating companies, which in turn werelimited to the amount of the deductible in our workers’compensation insurance policy. Atlantic North Casualty Company wasliquidated in October  2004.

In addition, we maintaincatastrophic coverage of $25.0 million per occurrence, for anunlimited number of occurrences, subject to a $100,000 deductible peroccurrence. This insurance provides replacement cost coverage forlosses on our fleet and insurance against business interruptionsresulting from the occurrence of natural catastrophes. We also maintainproperty insurance for the replacement cost of all of our real andpersonal property.

Environmental Matters

Our operationsare subject to extensive and constantly evolving federal, state andlocal environmental and occupational health and safety laws andregulations, including laws and regulations governing air emissions,wastewater discharges, the storage and handling of chemicals andhazardous substances, and the remediation of contaminated soil andgroundwater (‘‘Environmental Laws’’). Weare taking into account the requirements of such Environmental Laws inthe improvement, modernization, expansion and start-up of ourfacilities. As with most transportation companies, we could incursignificant costs related to environmental compliance or remediation;these costs, however, most likely would be incurred over a period ofyears. Compliance with Environmental Laws or more vigorous enforcementpolicies of regulatory agencies, or stricter or differentinterpretations of such laws and future regulatory action regardingsoil or groundwater, may require material expenditures by us.

Under various Environmental Laws, a current or previous owner ofreal estate or operations thereon may be liable for the costs ofremoval or remediation of certain hazardous substances or petroleumproducts on, under or in such property, without regard to whether theowner or operator knew of, or caused, the presence of contaminants. Thepresence of (or failure to properly remediate) such substances mayadversely affect the ability to sell or rent such real estate or toborrow using such real estate as collateral. Similarly, persons whogenerate or arrange for the disposal or treatment of hazardoussubstances may be liable for the costs of investigation, remediation orremoval of such hazardous substances at or from the disposal ortreatment facility regardless of whether such facility is owned oroperated by such persons. Finally, the owner of a site may be subjectto common law claims by third parties based on damages and costsresulting from environmental contamination emanating from a site.

As outlined above, we may be potentially liable for costs related toenvironmental compliance and remediation. We cannot predict with anycertainty the costs of remediation or compliance, including potentialpenalties, which costs could have a material adverse effect on us.

Government Regulation

We are subject to a widevariety 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. Ourvehicles are subject to federal motor vehicle safety standardsestablished by the National Highway Traffic Safety Administration(‘‘NHTSA’’). Specific standards arepromulgated by NHTSA with regard to school buses pursuant to the SchoolBus Safety Act of 1974. Our vehicles are also subject to the laws andregulations of each state in which we operate, which are often morestringent than applicable federal requirements. For example, in NewYork State, in addition to federal standards, regulations promulgatedby the New York State Department of Motor Vehicles and the New YorkState Department of Transportation(‘‘NYSDOT’’) require that school buses beequipped with safety belts (for vehicles manufactured after 1988), highback seats, left-handed emergency door exits, 16-gauge side panels andilluminated school bus signs. All school buses and paratransit vehiclesare required to be inspected twice annually by NYSDOT inspectors inaccordance with a rigorous set of standards covering each mechanicalcomponent of the vehicles.

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Our employees are subject to variousfederal and state laws and regulations pertaining to driverqualifications and drug, alcohol and substance abuse testing. TheCommercial Motor Vehicle Safety Act of 1986 requires drivers ofcommercial vehicles, including school buses, motor coaches andparatransit vehicles, to obtain a commercial driver's license.Many states have additional licensing requirements for subclasses ofdrivers such as school bus drivers and/or paratransit drivers. Underregulations enacted at the state and/or local levels, our school busdrivers and paratransit drivers are required to complete certainminimum basic training and refresher classes annually. Our drivers arekept up to date with changes in applicable regulations through theserefresher classes. Pursuant to regulations promulgated by the UnitedStates Department of Transportation under the Drug Free Workplace Actof 1988, our drivers are required to undergo pre-employment drug andalcohol testing, and we are required to conduct random testing for drugand/or alcohol abuse. Similar drug and alcohol abuse testing is alsorequired under various state laws. Our operating and maintenancefacilities are also required to be maintained in accordance withregulations promulgated by various federal and state agencies,including departments of education, departments of motor vehicles, andstate departments of transportation.

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| Item1A.  | Risk Factors. |

Risk Factors Relating toOur Business

Our business is dependent upon school bustransportation contracts with school districts, which contracts may notbe renewed or rebid.

Historically, our school bustransportation contracts have had initial terms between one and fiveyears, generally subject to extension, where permitted by law, uponexpiration at the discretion of the school districts with our agreementfor additional contract periods. Although since 1979 we have achieved asubstantially high contract renewal rate, the decision to renewcontracts is not made solely by us and may be based upon factors beyondour control. Any significant decrease in this historical renewal ratecould have a material adverse effect on us. There can be no assurancethat any of our current or future contracts will be extended, or ifextended, that the rates of compensation for such extensions will beacceptable to us. Moreover, there can be no assurance that the schooldistricts that currently employ our services will not seek to satisfytheir transportation needs in the future by alternative means. A lossof a significant number of contracts, or those contracts which accountfor a significant percentage of our revenues, would have a materialadverse effect on our results of operations.

Our bankruptcyreorganizations could harm our business, financial condition andresults of operations.

In December 2003, we emergedfrom reorganization under Chapter 11 of the United StatesBankruptcy Code. Certain claims in our Chapter 11 bankruptcycase remain unsettled and are subject to ongoing negotiation andpossible litigation. As of June  30,  2006, we haverecorded liabilities of approximately $3.4 million for prioritytax claims, certain cure costs, claims to be negotiated for leases andcontracts, general unsecured claims and certain secured claims,collectively recorded as payable to creditors under our plan ofreorganization, and approximately $4.8 million for outstandingadministrative priority claims, based on professionals' claimsthat we were aware of as of that date, recorded as accounts payable,accrued expenses and other liabilities. Our past inability to meet ourobligations that resulted in our filing for bankruptcy protection, orthe perception that we may not be able to meet our obligations in thefuture, could adversely affect our ability to obtain adequate financingand our relationships with our customers, as well as our ability toretain or attract high-quality employees.

We may beadversely affected by rising insurance costs.

Our cost ofmaintaining vehicle liability, personal injury, property damage andworkers' compensation insurance is significant. We couldexperience higher insurance premiums as a result of adverse claimsexperience or because of general increases in premiums by insurancecarriers for 

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reasons unrelated to our own claimsexperience. As an operator of school buses and other high occupancyvehicles, we are exposed to claims for personal injury or death andproperty damage as a result of accidents. Generally, our insurancepolicies must be renewed annually. Our ability to continue to obtaininsurance at affordable premiums also depends upon our ability tocontinue to operate with an acceptable safety record. A significantincrease in the number of claims against us, the assertion of one ormore claims in excess of our policy limits or the inability to obtainadequate insurance coverage at acceptable rates, or at all, could havea material adverse effect on us. In addition, the running of statutesof limitations for personal injuries to minor children typically issuspended during the children's legal minority. Therefore, it ispossible that accidents causing injuries to minors on school buses maynot give rise to lawsuits until a number of years later, which couldalso have a material adverse effect on us.

Additionally, wetypically negotiate transportation contracts on a different time framethan our contracts for insurance and our transportation contracts aretypically fixed price contracts. As a result, we were unable to absorbincreases in insurance and other operating expenses in recent years.Our inability to pass on changes in underlying costs was a significantreason for our seeking protection from creditors in ourChapter 11 bankruptcy case. We cannot assure you that suchincreases in insurance and other expenses will not happen again in thefuture. See the risk factor ‘‘— Fluctuations inthe cost of fuel could adversely affect our business’’and ‘‘Business — Risk Management andInsurance.’’

Fluctuations in the cost of fuelcould adversely affect our business.

We operated a fleet ofapproximately 6,000 vehicles as of June  30,  2006 andconsume substantial quantities of fuel for our operations. Our fuelcosts for the year ended June  30,  2006 were approximately$22.6  million as compared to $18.3 million for the yearended June  30,  2005. Historically, we have been unable topass through most increases in the price of fuel to the schooldistricts we service. From time to time in the past, we have enteredinto hedging contracts to protect ourselves from fluctuations in thecost of fuel and we may seek to do the same in the future. Based on ourcurrent operations, an increase in fuel costs of ten cents per gallonwill increase our cost of fuel purchased by approximately$1.0 million on an annual basis. No assurance can be given thatwe will be able to adequately protect ourselves from fluctuating fuelcosts.

We may not be able to maintain letters of credit orperformance bonds required by our transportationcontracts.

Our school bus transportation contractsgenerally provide for performance security in one or more of thefollowing forms: performance bonds, letters of credit and cashretainages. The contracts also require the maintenance of minimumamounts of insurance coverage, the maintenance of appropriatefacilities and transportation equipment, and the implementation ofvarious operating rules and regulations. There can be no assurance thateither letters of credit or performance bonds will continue to beavailable to us as security for our contracts or, if available, at acost that does not adversely affect our margins or cash flow. Thenumber of school buses to be provided under our contracts generally maydecrease, and hence the revenues generated under such contracts maydecrease based on the requirements of our customers. All school buscontracts can be terminated by school districts for not meeting certainperformance related criteria.

Some of our transportationcontracts may be terminated due to factors beyond ourcontrol.

Some of our school bus transportation contractsmay be terminated due to factors beyond our control, such as decreasesin funding for our customers. Paratransit contracts may be cancelled onshort notice at the option of our customers. Although we believe wehave established strong relationships with our customers, there can beno assurance that our contracts will not be affected by circumstancesbeyond our control.

Our fixed contract rates may not besufficient to absorb future cost increases.

The school bustransportation industry is characterized by fixed price contractsbetween transportation companies and municipalities, whereby changes inunderlying costs to transportation 

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companies are not automatically passed alongto the customer. Our inability to pass on our insurance costs was asignificant reason for our seeking protection from our creditors in ourChapter 11 bankruptcy case. Our contracts for school bus transportationand paratransit services have average terms of one to five years. Weset contract rates when we enter into such contracts, often beforeother expenses have been firmly established for the duration of thetransportation contract, and before we have complete knowledge of thecosts of insurance, labor and other expenses. After we have establishedcontract rates, we may be unable to adjust them for cost increases ininsurance, labor and other expenses. We have been able to leverage ourrelationships with our customers to achieve high contract renewal rateswith price increases and obtain concessions in some existing contractsto absorb cost increases to maintain profitability levels. We cannotassure you that the price increases in our contracts will be sufficientto absorb any cost increases in the future or that we will be able toobtain concessions in existing contracts to absorb cost increases inthe future.

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

As ofJune  30,  2006, approximately 77% of our employeeswere members of various labor unions. We were party to thirtycollective bargaining agreements, of which four agreements excludingLocal 1181 of the Amalgamated Transit Union (‘‘Local1181’’), covering approximately 340 employees, havealready expired, eight agreements, covering approximately 2,150employees, will expire over the next two years, with the remainder toexpire over the next three to five years.. Although no assurance can begiven, we do not believe that the expiration of such collectivebargaining agreements will have a material adverse effect on our laborcosts. No assurance can be given as to the outcome of negotiations withthe representatives of the unionized employees.

Our laborcontracts are not necessarily for the same terms as our school bustransportation contracts. Although we believe that historically we havehad satisfactory labor relations with our employees and their unions,our inability to negotiate acceptable union contracts in the future ora deterioration of labor relations could result in strikes or workstoppages and increased operating costs as a result of higher wages orbenefits paid to union members, which would have a material adverseeffect on us. In addition, labor shortages in selected markets couldmaterially adversely affect our ability to enter or expand in suchmarkets. There can be no assurance that we will not have a strike orwork stoppage in the future. See ‘‘Business —Employees.’’

We may be adversely affected byenvironmental requirements.

Our operations are subject toextensive and constantly evolving federal, state and localenvironmental and occupational health and safety laws and regulations,including laws and regulations governing air emissions, wastewaterdischarges, the storage and handling of chemicals and hazardoussubstances and the remediation of contaminated soil and groundwater.Additional expenditures, beyond those currently included in capital andoperating budgets, may be incurred in order to comply with either newenvironmental legislation and regulations, new interpretations ofexisting laws and regulations or more rigorous enforcement of such lawsand regulations. It is not possible to predict whether these newexpenditures will be material. We are also subject to liability for theinvestigation and remediation of environmental contamination (includingcontamination caused by other parties) at properties that we own oroperate and at other properties where our predecessors or we haveoperated or arranged for the disposal of hazardous substances. We donot believe that any such liabilities or environmental complianceobligations will have a material adverse effect on our business oroperations. However, we cannot make assurances that such liabilities orcompliance obligations will not increase in the future or will notbecome material. See ‘‘Business — EnvironmentalMatters.’’

We may be adversely affected bycurrent and new governmental laws and regulations.

We arerequired to comply with laws and regulations relating to safety, driverqualifications, insurance and other matters promulgated by variousfederal and state regulatory agencies including, among others, statemotor vehicle agencies, state departments of education, the FederalHighway and Safety Administration, the National Highway Traffic SafetyAdministration and the Occupational 

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Safety and Health Administration. We arealso required to comply with certain statutes, such as the Americanswith Disabilities Act. We have incurred, and expect to incur, costs forour operations to comply with these legal requirements, and these costscould increase in the future. Many of these legal requirements providefor substantial fines, orders, including orders to cease operations,and criminal sanctions for violations. Although we believe we are inmaterial compliance with applicable safety laws and regulations, it isdifficult to predict the future development of such laws andregulations or their impact on our business or results of operations.We anticipate that standards under these types of laws and regulationswill continue to tighten and that compliance will require increasedcapital and other expenditures. Furthermore, we cannot predict whethernew laws or regulations will be adopted and, if adopted, no assurancecan be given that the implementation of such laws or regulations andany additional compliance costs associated therewith will not have amaterial adverse effect on us. Also, a significant order or judgmentagainst us, the loss of a significant permit or license or theimposition of a significant fine or any other liability in excess of,or not covered by, our reserves or our insurance could adversely affectour business, financial condition and results of operations. See‘‘Business — GovernmentRegulation.’’

We have significant capitalexpenditure requirements.

In order to maintain our schoolbus fleet, we will be required to make significant capitalexpenditures. We normally make non-vehicle capital expenditures ofapproximately $5 to $8 million annually, plus capitalexpenditures for vehicles, which amount varies from year to yeardepending on our company's needs and business conditions. For theyears ended June  30,  2005 and June  30,  2006the majority of our new vehicle requirements were financed thoughoperating leases. We made total capital expenditures of$19.2 million, $8.2  million and $6.5 million forthe fiscal years ended June 30, 2004, 2005 and 2006,respectively. The indenture governing the notes and our senior creditfacility restrict the amount of capital expenditures we can makeannually. There can be no assurance that cash flow from operations willenable us to acquire a sufficient number of new vehicles or makecapital expenditures necessary to implement any expansion of service.If we are required to obtain additional financing, there can be noassurance that we can obtain financing on terms acceptable to us. Ourinability to procure the financing necessary to acquire additionalschool buses or make needed capital improvements could delay or preventus from implementing our business strategy and would have a materialadverse effect on us. See ‘‘Business — FleetManagement and Maintenance.’’ In addition, the indenturegoverning the notes and our senior credit facility limit our ability tomake capital expenditures, which could make it difficult to maintainour assets to the degree that our customers or we may otherwiserequire.

We depend on management and keypersonnel.

Domenic Gatto, who is our Chief ExecutiveOfficer and President, is key to our management and direction. The lossof the services of Mr. Gatto could have a material adverseeffect on us, and there can be no assurance that we would be able tofind a replacement for Mr. Gatto with the equivalent businessexperience and skills. Mr. Gatto's current employmentcontract with us expires in December 2008.

Theinterests of our significant shareholder may be different than yourinterests.

As of September  15,  2006, GSCbeneficially owns 83.9% of AETG's outstanding commonshares. AETG owned 80% of our issued and outstanding commonshares on a fully diluted basis. Pursuant to a stockholders agreementfor AETG's common shares, as more fully described under‘‘Related Party Transactions — StockholdersAgreement,’’ GSC is entitled to designate a majority ofthe directors to AETG's board of directors so long as itbeneficially owns at least 35% of AETG's outstandingcommon shares. As a result, the directors appointed by GSC are in aposition to control all matters affecting AETG and our company. Suchconcentration of ownership may have the effect of preventing a changein control. Further, as a result, GSC will continue to have the abilityto elect and remove directors and determine the outcome of matterspresented for approval by our shareholders. The interests of oursignificant shareholder may not be fully aligned with and couldconflict with, the interests of the holders of the notes. See‘‘Management — Board of Directors’’and ‘‘Principal Shareholders.’’

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We may be adversely affected bysubstantial competition in the school bus transportation industry andincreased consolidation within the industry.

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

In particular, the school bustransportation industry is undergoing significant consolidation thathas intensified the competition for contracts and acquisitions. Fromtime to time, we make unsolicited inquiries with respect to possibleacquisitions and from time to time have received unsolicited inquirieswith respect to a possible acquisition of our company. Whether suchinquiries will result in further communications, or ultimately, anacquisition, has depended and will depend upon the facts andcircumstances in each case. Any failure to compete effectively couldhave a material adverse effect on us. See ‘‘Business— Competition’’ and ‘‘Business— Industry Overview — School Bus TransportationIndustry.’’

Our business is subject toseasonality and fluctuations in quarterly operatingresults.

The school bus transportation operation, whichaccounted for at approximately 88% of our revenues fromcontinuing operations for each of the last three fiscal years, isseasonal in nature and generally follows the pattern of the schoolyear, with sustained levels of business during the months of Septemberthrough June. As a result, we have experienced, and expect to continueto experience, a substantial decline in revenues from late June throughearly September. Our quarterly operating results have also fluctuateddue to a variety of factors, including variation in the number ofschool days in each quarter (which is affected by the timing of thefirst and last days of the school year, holidays, the month in whichspring break occurs and adverse weather conditions, which can closeschools) and the profitability of our other operations. In particular,historically we have generated operating losses during the firstquarter of each fiscal year. Consequently, interim results are notnecessarily indicative of the full fiscal year and quarterly resultsmay vary substantially, both within a fiscal year and betweencomparable fiscal years. See ‘‘Management'sDiscussion and Analysis of Financial Condition and Results ofOperations.’’

Risk Factors Relating to theNotes

Our substantial indebtedness could adversely affectour financial condition and prevent us from fulfilling our obligationsunder the notes.

As of June  30,  2006, we hadtotal indebtedness of $163.0 million (net of unamortizedoriginal issue discount of $1.7  million). Our substantialindebtedness could have important consequences to you and our company.For example, it could:

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|  | •   | make it moredifficult for us to satisfy our obligations with respect to thenotes; |

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|  | •   | increase our vulnerability togeneral adverse economic and industry conditions; |

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|  | •   | require us to dedicate a substantialportion of our cash flow from operations to payments on ourindebtedness, thereby reducing the availability of our cash flow tofund working capital, capital expenditures and other general corporatepurposes; |

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|  | •   | limit our flexibility inplanning for, or reacting to, changes in our business and the industryin which we operate; |

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|  |               |                                                                                           |
|--|---------------|-------------------------------------------------------------------------------------------|
|  | •   | place us at acompetitive disadvantage compared to our competitors that have lessdebt; and |

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|  | •   | limit our ability to borrowadditional funds. |

Restrictive covenants in our seniorcredit facility, the indenture governing the notes and our othercurrent and future indebtedness could adversely restrict our operatingflexibility.

The discretion of our management with respectto certain business matters is limited by covenants contained in oursenior credit facility and the indenture governing the notes, as wellas other current and future debt instruments. Among other things, thecovenants contained in the indenture restrict, condition or prohibit usfrom incurring additional indebtedness, making certain payments,creating liens on our assets, making certain asset dispositions andentering into certain transactions with affiliates. In addition, oursenior credit facility contains financial and operating covenants,including requirements that we maintain a minimum trailing twelvemonths EBITDA, as defined therein, determined monthly and limitationson our capital expenditures. EBITDA is defined in our senior creditfacility as, for any period, our net income or loss before income orloss from discontinued operations for such period, plus (a) tothe extent deducted in computing such consolidated net income or loss,without duplication, the sum of (i) income tax expense,(ii) interest expense, (iii) depreciation andamortization expense, and (iv) non-cash extraordinary ornonrecurring losses or non-recurring expenses including non-cashimpairment charges, (v) reorganization expenses incurred by us,including up to a maximum of $1,050,000 in respect of certainmanagement exit bonuses, and (vi) cash capital contributions toour company permitted by our senior credit facility, plus (vii) for theperiod ending June  30,  2006 any adjustments to prepaidinsurance or insurance reserves and corresponding charges to insuranceexpense made on June  30,  2005 in an amount no greaterthan $2.8  million, minus (b) to the extent added incomputing such consolidated net income or loss, without duplication,extraordinary or non-recurring income or gains.

LTM EBITDA on aquarterly basis, as defined in the Company’s indenture governingthe Notes, is similar to the above except that cash capitalcontributions and the insurance adjustment are not added back in theEBITDA calculation. On March  31,  2006, our companyreceived the requisite consents from the holders of the notes to amendthe EBITDA covenant of the indenture so it would not apply untilDecember 31, 2006. As of June  30,  2006, ourtrailing twelve months EBITDA, as defined by our senior credit facilityand indenture, was $31.2  million

Despitecurrent indebtedness levels and restrictive covenants, we may still beable to incur substantial additional debt, which could exacerbate therisks described above.

We may be able to incur additionaldebt in the future. Although the indenture governing the notes and oursenior credit facility contain restrictions on our ability to incurindebtedness, those restrictions are subject to a number of exceptions.In addition, if we were able to designate some of our restrictedsubsidiaries under the indenture governing the notes as unrestrictedsubsidiaries, those unrestricted subsidiaries would be permitted toborrow beyond the limitations specified in the indenture and engage inother activities in which restricted subsidiaries may not engage.Adding new debt to current debt levels could intensify theleverage-related risks that our subsidiaries and we now face.

To service our indebtedness, we will require asignificant amount of cash. Our ability to generate cash depends onmany factors beyond our control.

Our ability to makepayments on and to refinance our indebtedness, including the notes, andto fund planned capital expenditures will depend on our ability togenerate cash in the future. This, to a certain extent, is subject togeneral economic, financial, competitive, legislative, regulatory andother factors that are beyond our control.

Our outstanding debt,without giving effect to the unamortized original issue discount on theoutstanding notes, was $164.7 million as of June30,  2006. We believe that we will need approximately$20.0 million in cash annually to service interest on our debtobligations. As of September  15,  2006, we hadapproximately $13.6 million in letters of credit, a$3.5 million advance under the letter of credit facility, and$8.0 million of borrowings outstanding under our senior creditfacility (including the 

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$3.5  million supplemental loan).Interest on our senior credit facility is approximately 9.25%per annum, based on a prime interest rate of 8.25% as ofSeptember  15,  2006, except for the $3.5 millionportion of our senior credit facility, which bears interest at12% per annum. Letters of credit are subject to a fee ofapproximately 1% per annum. Additionally, we normally makenon-vehicle capital expenditures of approximately $5.0  millionannually, plus capital expenditures for vehicles, which amount variesfrom year to year depending on our company's needs and businessconditions. We made total capital expenditures of $19.2 million,$8.2 million and $6.5 million for the fiscal years endedJune 30, 2004, 2005 and 2006, respectively. The indenturegoverning the notes and our senior credit facility restrict the amountof capital expenditures we can make annually.

We may need torefinance all or a portion of our indebtedness, including the notes, onor before there stated maturity. We cannot assure you that we will beable to refinance any of our indebtedness, including our senior creditfacility and the notes, on commercially reasonable terms, or atall.

We have a history of net losses and may incuradditional losses in the future.

We sustained net losses of$57.4 million, $20.5 million, $42.4 million and$29.6 million for the fiscal years ended 2002, 2003, 2005, and2006, respectively. In addition, net income for fiscal year 2004 of$56.8  million included forgiveness of indebtedness income ofapproximately $102.9 million. Future losses could adverselyaffect our ability to fund planned capital expenditures and to makepayments on the notes. As a result, you could lose all or part of yourinvestment. See ‘‘Management's Discussion andAnalysis of Financial Condition and Results ofOperations.’’

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

We are a holding company thatderives all of our operating income and cash flow from our subsidiariesand accordingly, our ability to make payments on the notes is dependenton the earnings and the distribution of funds from our subsidiaries.However, none of our subsidiaries is obligated to us to make fundsavailable for payment on the notes. Our subsidiaries will be permittedto incur additional indebtedness that may limit the making ofdistributions, the payment of dividends or the making of loans by suchsubsidiaries to us. Although existing agreements do not limit theability of our subsidiaries to make payments to us, we cannot assureyou that the agreements governing the current and future indebtednessof our subsidiaries will permit our subsidiaries to provide us withsufficient dividends, distributions or loans to fund payments on thesenotes when due.

The notes and the related guarantees arenot secured by a first priority lien on all of ourassets.

The notes and the related guarantees are secured bya first priority lien, subject to certain permitted prior liens, on allbut one of our and our guarantor subsidiaries' owned realproperties and certain of our and our guarantor subsidiaries'hereafter acquired real properties (the ‘‘first lien realproperty’’) and on substantially all of our and ourguarantor subsidiaries' owned motor vehicles, whether now ownedor hereafter acquired, other than motor vehicles classified as assetsof discontinued operations on the date of the indenture governing thenotes or which are subject to purchase money liens (the‘‘motor vehicles,’’ and together with thefirst lien real property, the ‘‘first liencollateral’’). The lenders under our senior creditfacility have a first priority lien on substantially all of our and ourguarantor subsidiaries' assets, subject to certain permittedprior liens, other than the first lien collateral and certain excludedassets as described in the definition of ‘‘ExcludedAssets’’ under ‘‘Description of theExchange Notes’’ (the ‘‘second liencollateral’’), and a second priority lien on the firstlien real property. The notes benefit from a second priority lien onthe second lien collateral. The lenders under our senior creditfacility do not have a lien on the motor vehicles.

Othercreditors will be entitled to receive proceeds from the sale of certainof our assets before the holders of the notes.

The proceedsfrom the sale of the first lien collateral may not be sufficient to payall amounts owed on the notes. The first lien collateral may be lessliquid than the second lien collateral. 

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Additionally, the amount to be received uponthe sale of such collateral will depend on many factors, as more fullydescribed in the risk factor ‘‘— The collateralsecuring the notes may be reduced or diluted under certaincircumstances.’’ We cannot assure you that theliquidation value of the first lien collateral would be adequate torepay the principal amount of, or premium, if any, and any accrued andunpaid interest on all of the outstanding notes.

The lendersunder our senior credit facility are entitled to receive 20% ofthe proceeds from any sale of the second lien collateral to repay theirobligations in full before the holders of the notes will be entitled toany proceeds from any such sale of the second lien collateral. Theproceeds from the second lien collateral may not be sufficient to repayboth the lenders under our senior credit facility and the holders ofthe notes. We cannot assure you that, in the event of a foreclosure,the proceeds from the sale of all second lien collateral would besufficient to pay in full all obligations secured by the first priorityliens on such collateral or any portion of the amounts owed under theoutstanding notes.

If the proceeds from the sale of the firstlien collateral and the second lien collateral were not sufficient torepay all obligations secured by such collateral, then the holders ofthe notes, to the extent not repaid from the proceeds of the sale ofthe first lien collateral and second lien collateral, would only havean unsecured claim against our remaining assets, if any. This claimwould rank equal in priority to the unsecured claims with respect toany unsatisfied obligations under our senior credit facility and ourother unsecured senior indebtedness and the unsecured seniorindebtedness of our guarantor subsidiaries.

The value ofthe collateral securing the notes may not be sufficient to satisfy ourand our subsidiaries' obligations under the notes.

Wehave not performed any recent appraisals on the value of thecollateral. The book value of the collateral should not be relied on asa measure of realizable value for such assets. By their nature,portions of the collateral may be illiquid and may have no readilyascertainable market value. In addition, a significant portion of thecollateral includes assets that may only be usable, and thus retainvalue, as part of our existing operating businesses. Accordingly, anysuch sale of the collateral separate from the sale of certain operatingbusinesses may not be feasible or of significant value. Also, an entitythat forecloses on the real property comprising a portion of thecollateral is potentially liable for environmental claims. See the riskfactor ‘‘— Because the collateral includes realproperty, you may be liable under limited circumstances forenvironmental claims related to real property.’’ Inaddition, the collateral is located in a number of locations, and themulti-jurisdictional nature of any foreclosure on the collateral maylimit the realizable value of the collateral.

The ability of thetrustee to foreclose on the collateral on your behalf may also besubject to perfection, the consent of third parties, governmentalapprovals and practical problems associated with the realization of thecollateral agent's security interest in the collateral. We havenot obtained the consent of third parties whose consent may benecessary to allow the collateral agent to foreclose on the collateralconsisting of contract rights or collateral as to which third partieshave contractual rights. We cannot assure you that the consents of suchthird parties or any required approvals of governmental entities willbe given when required to facilitate a foreclosure on such assets.

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

We entered into security documents,which grant to the administrative agent for the lenders under oursenior credit facility a first lien on the second lien collateral, andgive the administrative agent certain rights with respect to the secondlien collateral. The collateral agent entered into an intercreditoragreement with the administrative agent, which will define the rightsof the parties with respect to the second lien collateral and theparties' liens thereon. The administrative agent and the lendersunder our senior credit facility, who have a first priority lien on thesecond lien collateral, control substantially all matters related tothe second lien collateral and the collateral agent's rights andremedies with respect thereto. At any time that obligations areoutstanding under our senior credit facility, the administrative agentshall have the sole and exclusive right to control, administer,

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account for and otherwise deal with thesecond lien collateral and to determine the manner of every sale orother disposition of the second lien collateral, in each case, uponenforcement of the administrative agent's interest, and toforeclose on the second lien collateral in any order which it deemsappropriate. As a result, the administrative agent for the lenders maydispose of or foreclose on, or take other actions with respect to, thesecond lien collateral with which the holders of the notes may disagreeor that may be contrary to the interests of the holders of the notes.Also, the collateral agent and the holders of the notes are unable toexercise remedies with respect to the second lien collateral unless anduntil the administrative agent for the lenders exercises its rights andremedies with respect to the second lien collateral, and then only on alimited basis.

The sale of assets constituting collateralsecuring the notes may be used to repay our obligations on our seniorcredit facility.

Certain asset sales, including certainsales of assets constituting first lien collateral or second liencollateral, are subject to compliance with limitation on asset sales.Under that covenant, we are permitted to use 20% of the proceedsfrom such asset sales to repay outstanding indebtedness under oursenior credit facility, make an investment in properties and assetsthat replace the properties and assets sold or in the business of ourcompany and restricted subsidiaries, or a combination thereof. Any suchrepayment need not cause any permanent reduction in borrowing capacityunder our revolving credit facility. We may be required under oursenior credit facility to use the proceeds from any such asset sale,including sales of first lien collateral or second lien collateral, torepay outstanding obligations under it. Therefore, the value of thecollateral securing the notes may diminish as a result of any suchasset sales.

The collateral securing the notes may bereduced or diluted under certain circumstances, including the issuanceof additional notes.

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

The indenture governing the notes requires us to issue, effectiveOctober  1,  2006, PIK notes in payment of a portion of theinterest payable in respect of the notes and permits us to issue thereunder, subject to compliance with the covenant which limits theincurrence of additional indebtedness’’ and withoutlimitation on the maximum principal amount, additional notes onsubstantially identical terms as the notes offered hereby. Any PIKnotes and additional notes subsequently issued will be secured equallyand ratably with the notes issued. The issuance of PIK notes andadditional notes will have the effect of diluting the value of thesecurity interest in the first lien collateral and second liencollateral for the then outstanding notes. Such dilution will reduceyour pro rata share of any proceeds from the sale of any first liencollateral and second lien collateral.

The indenture governingthe notes and the agreements governing our other secured indebtednesspermit us to designate one or more of our restricted subsidiaries as anunrestricted subsidiary. If we designate an unrestricted subsidiary,all of the liens on any collateral owned by the unrestricted subsidiaryand any guarantee of the notes by the unrestricted subsidiary will bereleased under the indenture, but the guarantee of our senior creditfacility by the unrestricted subsidiary may not be released under oursenior credit facility. Designation of an unrestricted subsidiary willreduce the aggregate value of the collateral to the extent that lienson the assets of the unrestricted subsidiary are released and the noteswill be structurally subordinated to the debt and other obligations ofthe unrestricted subsidiary. This may materially reduce the collateralsecuring the notes.

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Because the collateral includes realproperty ,note holders may be liable under limited circumstances forenvironmental claims related to the real property.

Aportion of the collateral securing the notes and the guarantees iscomprised of real property. The real property portion of the collateralmay be subject to known and unforeseen environmental risks. Under theComprehensive Environmental Response, Compensation and Liability Act of1980, or CERCLA, a lender may be held liable for the costs ofremediation or preventing releases, or threatened releases, ofhazardous substances at mortgaged property if the lender takes title tothe 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 protectionsfrom such liability for lenders who do not act as owners or operatorsof the property. A lender who holds indicia of ownership, such as titleor rights of access and inspection, primarily to protect its securityinterest, or who forecloses and then re-sells or re-leases a propertyin which it holds a security interest within a commercially reasonabletime, is not liable as an owner or operator under CERCLA unless thatlender participates in the management of the property. Participation inmanagement means exercising actual control or decision-making authorityover general operations or over environmental compliance at thefacility. There may be similar risks under common law theories oflender liability, such that a lender's involvement in operationaldecisions or environmental compliance matters may create liabilityunder other environmental laws, both state and federal. Alender's CERCLA liability is not limited by the value of thesecured interest and could extend to the entire cost of theremediation. As a result, a holder of the notes who is determined to bean owner or operator of real property securing the notes may have jointand several liability in a cost recovery or contribution action underCERCLA. This liability would not be limited by the principal amount ofthe notes held by the holder of the notes or the value of the realproperty

Third party claims may significantly diminish thevalue of our real property collateral.

The title insurancepolicies on the real property portion of the collateral, including anyobtained after the completion of this exchange offer, containexceptions as to rights of third parties. Third parties may make claimsthat they are entitled to exercise such rights in a manner that isadverse to our real estate interests and/or improvements. If any suchclaims are pursued and upheld, this may significantly diminish thevalue, if any, of such real property collateral. In addition, we may berequired to take corrective action as a result of such claims,including procuring additional real estate interests and/or relocatingimprovements, and we may sustain costs, expenses and/or a reduction inrevenue as a result of such circumstances. These reductions in value,costs, expenses and losses associated with excepted matters would notbe covered by title insurance.

Insolvency andadministrative laws could adversely affect the note holders ability toenforce your rights under the notes, the note guarantees and thesecurity documents.

If a bankruptcy proceeding were to becommenced under the federal bankruptcy laws by or against us or anysubsidiary guarantor, it is likely that delays will occur in anypayment upon acceleration of the notes and in enforcing remedies underthe related indenture, including with respect to the liens securing thenotes and the note guarantees, because of specific provisions of suchlaws or by a court applying general principles of equity. Provisionsunder federal bankruptcy laws or general principles of equity thatcould result in the impairment of your rights include, but are notlimited to: the automatic stay; avoidance of preferential transfers bya trustee or debtor-in-possession; substantive consolidation;limitations on collectability of unmatured interest or attorney fees;fraudulent conveyance; and forced restructuring of the notes, includingreduction of principal amounts and interest rates and extension ofmaturity dates, over the holders' objections.

Additionally, applicable federal bankruptcy laws generally permit adebtor to continue to retain and to use collateral, even if the debtoris in default under the applicable debt instruments, provided that thesecured creditor is given ‘‘adequateprotection.’’ The interpretation of the term‘‘adequate protection’’ may vary accordingto circumstances, but it is intended in general to protect the value ofthe secured creditor's interest in collateral. Because the term‘‘adequate protection’’ is subject to

17

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varying interpretation and because of thebroad discretionary powers of a bankruptcy court, it is impossible topredict (1) whether payments under any of the notes would bemade following commencement of and during a bankruptcy case,(2) whether or when the lenders under our senior credit facilitycould foreclose upon or sell any collateral or (3) whether or towhat extent holders of the notes would be compensated for any delay inpayment or loss of value of the collateral under the doctrine of‘‘adequate protection.’’ Furthermore, inthe event a bankruptcy court were to determine that the value of thecollateral was not sufficient to repay all amounts due on the notes,the holders of such notes would become holders of ‘‘undersecured claims.’’ Applicable federal bankruptcy lawsgenerally do not permit the payment or accrual of interest, costs andattorneys' fees for ‘‘under securedclaims.’’

The notes and the noteguarantees and the granting of the collateral securing the noteguarantees may be voidable, subordinated or limited in scope under lawsgoverning fraudulent transfers and insolvency.

Although thenotes are our obligations, the subsidiary guarantors unconditionallyguarantee them on a senior secured basis. We are a holding company thatderives all of our operating income and cash flow from oursubsidiaries. The performance by each subsidiary guarantor of itsobligations with respect to its subsidiary guarantee may be subject toreview under relevant federal and state fraudulent conveyance andsimilar statutes in a bankruptcy or reorganization case or lawsuit byor on behalf of unpaid creditors of such subsidiary guarantor. Underthese statutes, if a court were to find under relevant federal or statefraudulent conveyance statutes that a subsidiary guarantor did notreceive fair consideration or reasonably equivalent value for incurringits subsidiary guarantee of the notes, and that, at the time ofincurrence, 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 theassets remaining with the subsidiary guarantor constituted unreasonablysmall capital or (4) intended to incur, or believed that itwould incur, debts beyond its ability to pay these debts as theymatured, then the court, subject to applicable statutes of limitation,could void the subsidiary guarantor's obligations under itssubsidiary guarantee, recover payments made under the subsidiaryguarantee, subordinate the subsidiary guarantee to other indebtednessof the subsidiary guarantor or take other action detrimental to theholders of the notes.

The measure of insolvency for thesepurposes will depend upon the governing law of the relevantjurisdiction. Generally, however, a company will be consideredinsolvent for these purposes if the sum of that company's debtsis greater than the fair value of all of that company's propertyor if the present fair salable value of that company's assets isless than the amount that will be required to pay its probableliability on its existing debts as they become absolute and matured orif a company is not able to pay its debts as they become due. Moreover,regardless of solvency, a court could void an incurrence ofindebtedness, including the subsidiary guarantees, if it determinedthat the transaction was made with the intent to hinder, delay ordefraud creditors. In addition, a court could subordinate theindebtedness, including the subsidiary guarantees, to the claims of allexisting and future creditors on similar grounds. The subsidiaryguarantees could also be subject to the claim that, since thesubsidiary guarantees were incurred for our benefit, and onlyindirectly for the benefit of the subsidiary guarantors, theobligations of the subsidiary guarantors thereunder were incurred forless than reasonably equivalent value or fair consideration. Neither wenor any subsidiary guarantor believes that, after giving effect to theoffering, any of the subsidiary guarantors (1) was insolvent orrendered insolvent by the incurrence of the guarantees in connectionwith the offering, (2) was not in possession of sufficientcapital to run their business effectively or (3) incurred debtsbeyond 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 inorder to determine whether a subsidiary guarantor was‘‘insolvent’’ upon the sale of the notes orthat, regardless of the method of valuation, a court would notdetermine that the subsidiary guarantor was insolvent at the time ofthe sale of the notes.

Our ability to purchase the notesupon a change of control may be limited.

Upon theoccurrence of a specified change of control, each holder of notes willhave the right to require us to repurchase all or a portion of suchholder's notes at a price in cash equal to 101% of

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their principal amount, plus accrued andunpaid interest, if any, to the date of repurchase. However, ourability to repurchase the notes upon a change of control may be limitedby the terms of our then existing contractual obligations and theobligations of our subsidiaries. In addition, the occurrence of achange of control is expected to require the repayment of borrowingsunder our senior credit facility. There can be no assurance that wewill have the financial resources to repay amounts due under suchsenior credit facility, or to repurchase or redeem the notes. If wefail to repurchase all of the notes tendered for purchase upon theoccurrence of a change of control, this failure will constitute anevent of default under the indenture. The occurrence of such event ofdefault under the indenture would constitute an event of default underthe terms of our senior credit facility. In addition, a specifiedchange of control constitutes an event of default under the terms ofour senior credit facility. See the risk factor‘‘— Our substantial indebtedness could adverselyaffect our financial condition and prevent us from fulfilling ourobligations under the notes’’ above.

With respectto the sale of assets referred to in the definition of‘‘change of control’’ under the indenture,the meaning of the phrase ‘‘all or substantiallyall’’ as used in that definition varies according to thefacts and circumstances of the subject transaction, has no clearlyestablished meaning under the relevant law and is subject to judicialinterpretation. Accordingly, in certain circumstances there may be adegree of uncertainty in ascertaining whether a particular transactionwould involve a disposition of ‘‘all or substantiallyall’’ of the assets of a person and therefore it may beunclear whether a change of control has occurred and whether the notesare subject to an offer to repurchase.

The change of controlprovision may not necessarily afford the holders protection in theevent of a highly leveraged transaction, including a reorganization,restructuring, merger or other similar transaction involving us thatmay adversely affect the holders, because these transactions may notinvolve a shift in voting power or beneficial ownership or, even ifthey do, may not involve a shift of the magnitude required under thedefinition of ‘‘change of control’’ underthe indenture to trigger these provisions. Except as described under‘‘Description of the Exchange Notes — Offers toRepurchase the Notes — Repurchase upon Change ofControl,’’ the indenture does not contain provisions thatpermit the holders of the notes to require us to repurchase or redeemthe notes in the event of a takeover, recapitalization or similartransaction.

The Notes were issued with original issuediscount for United States federal income taxpurposes.

Because the original notes were issued as part ofan investment unit for United States federal income tax purposes, aportion of the purchase price of the units was allocated to thewarrants. As a result, the exchange notes were issued with originalissue discount for United States federal income tax purposes. Thus,holders will be required to include the amounts representing theoriginal issue discount in gross income on a constant yield basis inadvance of receipt of the cash payments to which such income isattributable.

We will not meet a leverage test required underthe indenture and we will be obligated to pay additional interest onthe notes. Although the matter is not free from doubt, we take theposition for United States federal income tax purposes that the notesshould not be treated as ‘‘contingent payment debtinstruments’’ as a result of the possibility that anysuch payments will have to be made. This position is based in part onour determination that as of the date of issuance of the originalnotes, it is significantly more likely than not that such payments willnot be made. If the Internal Revenue Service were to challenge thisdetermination and successfully assert that the notes are contingentpayment debt instruments, United States Holders (as defined under‘‘Material United States Federal Income TaxConsequences’’) would be required to recognize suchadditional interest with respect to a note in income on a constantyield basis, subject to certain adjustments, under a method applicableto contingent payment debt instruments. In addition, United StatesHolders could be required to treat as ordinary income rather thancapital gain any income realized on the taxable disposition of a note.See ‘‘Material United States Federal Income TaxConsequences.’’ Holders should consult their own taxadvisors as to whether the notes will be treated as contingent paymentdebt obligations and the possible consequences of suchtreatment.

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|                |                           |
|----------------|---------------------------|
| Item 1B.  | UnresolvedStaff Comments. |

None.

|              |             |
|--------------|-------------|
| Item2.  | Properties. |

Our subsidiaries provideservices from 58 facilities for buses (of which five are owned and 53are leased) in seven states. The facilities are utilized for repair andmaintenance and/or administrative purposes. We believe that ourfacilities are adequate to service our present business and thecurrently anticipated expansion of existing operations.

Thefollowing table details the facilities that we own and our materialleased facilities, used for our school bus operations and paratransitand transit operations.

|                  |  |  |           |  |  |        |  |         |  |
|------------------|--|--|-----------|--|--|--------|--|---------|--|
| Location         |  |  | Ownership |  |  | Sq.Ft. |
| Oceanside,NY     |  |  | Owned     |  |  |        |  | 720,000 |  |
| Medford,NY       |  |  | Owned     |  |  |        |  | 280,000 |  |
| South Hampton,NJ |  |  | Owned     |  |  |        |  | 210,000 |  |
| Ridgewood,NY     |  |  | Owned     |  |  |        |  | 203,158 |  |
| Setauket,NY      |  |  | Owned     |  |  |        |  | 68,000  |  |
| Maspeth,NY       |  |  | Leased    |  |  |        |  | 120,000 |  |
| Los Angeles,CA   |  |  | Leased    |  |  |        |  | 159,587 |  |
| Staten Island,NY |  |  | Leased    |  |  |        |  | 144,292 |  |
| St. Louis,MO     |  |  | Leased    |  |  |        |  | 244,000 |  |
| Jamaica,NY       |  |  | Leased    |  |  |        |  | 225,000 |  |
| Bronx,NY         |  |  | Leased    |  |  |        |  | 223,000 |  |
| Brooklyn,NY      |  |  | Leased    |  |  |        |  | 186,840 |  |
| Bronx,NY         |  |  | Leased    |  |  |        |  | 147,000 |  |
| Bronx,NY         |  |  | Leased    |  |  |        |  | 208,000 |  |
|                  |

|              |                    |
|--------------|--------------------|
| Item3.  | Legal Proceedings. |

From time to time, weare involved in litigation that we consider to be in the normal courseof business. We are not presently involved in any legal proceedingsthat we expect individually or in the aggregate to have a materialadverse effect on our financial condition, results of operations orliquidity.

|               |                                                    |
|---------------|----------------------------------------------------|
| Item 4.  | Submission of Matters toa Vote of SecurityHolders. |

None.

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PARTII

|               |                                                                                                                   |
|---------------|-------------------------------------------------------------------------------------------------------------------|
| Item 5.  | Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities. |

As of June  30,  2006 ourauthorized capital stock consisted of 1,303,200 common shares, parvalue $.01 per share, based upon an amendment to our certificate ofincorporation, effective April 21, 2004, whereby we split ourauthorized capital stock. AETG owns 945,263 shares of our common stock.Holders of warrants issued pursuant to the offering of units, whichconsisted of the outstanding notes and warrants, on April22,  2004 are entitled, in the aggregate, to purchase 122,175common shares representing 11.0% of our outstanding commonshares on a fully diluted basis as of such date (assuming exercise ofall such warrants). The holder of warrants issued pursuant to theAdditional Indebtedness, (as defined below) which consisted of theoutstanding notes and warrants, on March  3,  2005 isentitled to purchase 40,752 common shares representing 5.0% ofour outstanding common shares on a fully diluted basis as of such date(assuming exercise of all such warrants). As of June  30,2006, we had one holder of our outstanding common shares. There is noestablished public trading market for the Company’s commonshares.

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

Holders of our common shares areentitled to receive a pro rata share of dividends when, as and ifdeclared by us out of funds legally available for the payment ofdividends and to participate pro rata in liquidating distributions. Ourability to pay dividends is limited by agreements governing ourindebtedness, including the notes and our senior credit facility.

Our board of directors may authorize the issuance of fractions ofshares represented by a certificate, or uncertificated, which shallentitle the holder to exercise voting rights, receive dividends andparticipate in liquidating distributions, in proportion to thefractional holdings; or it may authorize the payment in cash of thefair value of fractions of shares at the time when those entitled toreceive such fractions are determined; or in lieu of fractional sharesit may authorize the issuance, as permitted by law, of scripexchangeable as therein provided for full shares, but such scrip shallnot entitle the holder to any rights of a shareholder, except astherein provided.

AETG

AETG is authorized to issue1,650,000 common shares, par value $0.001 per share. As of June30,  2006, 128,240 common shares of AETG have been issued and areoutstanding.

Holders of outstanding AETG common shares areentitled, for each share held, to one vote upon each matter submittedto a vote at a meeting of its shareholders. Holders of AETG'scommon shares are entitled to receive a pro rata share of dividends,when, as and if declared by AETG out of funds legally available for thepayment of dividends and to participate pro rata in liquidatingdistributions. AETG does not presently anticipate that dividends willbe paid on the common shares in the foreseeable future.

AETG's certificate of incorporation prohibits issuances orredemptions of common shares, issuances of warrants or options (otherthan certain compensatory options), and transfers of AETG'scommon shares by GSC until the earlier of the third anniversary of theeffectiveness of the plan of reorganization or when AETG's boardof directors determines that the restrictions do not provide AETG withsignificant tax benefits. Holders of AETG's common shares have nosubscription, redemption or conversion rights.

AETG isauthorized to issue 500,000 preferred shares, par value $0.001 pershare, of which 100,000 shares have been designated as Series EConvertible Preferred Stock (the ‘‘Series E PreferredStock’’). As of June  30,  2006, 62,002.1shares of Series E Preferred Stock are outstanding.

Holders ofthe Series E Preferred Stock are not entitled to any voting rightsexcept as required by law. The holders of the Series E Preferred Stockare entitled to dividends at the rate of 10% per 

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annum payable quarterly in shares of Series EPreferred Stock. Each share of the Series E Preferred Stock isconvertible into one share of AETG common stock, at any time following(i) a liquidation event, (ii) a bona fide public offering of AETGcommon 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 orsale of substantially all the assets of AETG, the Series E PreferredStock is entitled to liquidation preference (senior to all othercapital stock of AETG) in the amount of $84.77 per share. The Series EPreferred Stock is subject to mandatory redemption in April  2009on the first anniversary date of the final maturity date of the Notesat a price of $84.77 per share.

|              |                          |
|--------------|--------------------------|
| Item6.  | Selected Financial Data. |

You should readthe information set forth below in conjunction with our‘‘Management's Discussion and Analysis of FinancialCondition and Results of Operations’’ and ourconsolidated financial statements and related notes included elsewherein this Form 10-K.

We derived the Statement of Operations Dataand the Other Financial Data for the years ended June 30, 2004,2005 and 2006 and the Balance Sheet Data as of June 30, 2005 and2006 from our audited financial statements included elsewhere in this10-K. We derived the Statement of Operations Data for the years endedJune 30, 2002 and 2003 and the Balance Sheet Data as ofJune 30, 2002, June 30, 2003 and June  30,2004 from our audited financial statements that are not included inthis Form 10-K.

|                                                             |  |  |                          |   |         |      |  |  |      |   |         |      |  |  |      |   |         |   |  |  |  |   |         |   |  |  |  |   |         |   |
|-------------------------------------------------------------|--|--|--------------------------|---|---------|------|--|--|------|---|---------|------|--|--|------|---|---------|---|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                        |  |  | FiscalYear Ended June30, |
|                                                        |  |  | 2002                     |   |         | 2003 |  |  | 2004 |   |         | 2005 |  |  | 2006 |
|                                                        |  |  | (Dollarsin thousands)    |
| Statement of OperationsData:                                |  |  |                          |   |    |      |  |  |      |   |    |      |  |  |      |   |    |   |  |  |  |   |    |   |  |  |  |   |    |   |
| Revenues:                                                   |  |  |                          |   |    |      |  |  |      |   |    |      |  |  |      |   |    |   |  |  |  |   |    |   |  |  |  |   |    |   |
| Schoolbusoperations                                         |  |  |                          | $ | 288,004 |      |  |  |      | $ | 300,433 |      |  |  |      | $ | 321,466 |   |  |  |  | $ | 319,605 |   |  |  |  | $ | 368,065 |   |
| Paratransitand transitoperations                            |  |  |                          |   | 56,953  |      |  |  |      |   | 48,602  |      |  |  |      |   | 42,055  |   |  |  |  |   | 44,071  |   |  |  |  |   | 45,993  |   |
| Totalrevenues                                               |  |  |                          |   | 344,957 |      |  |  |      |   | 349,036 |      |  |  |      |   | 363,521 |   |  |  |  |   | 363,676 |   |  |  |  |   | 414,058 |   |
| Costofoperations:                                           |  |  |                          |   |    |      |  |  |      |   |    |      |  |  |      |   |    |   |  |  |  |   |    |   |  |  |  |   |    |   |
| Costof operations – school busoperations              |  |  |                          |   | 262,446 |      |  |  |      |   | 260,492 |      |  |  |      |   | 285,645 |   |  |  |  |   | 298,907 |   |  |  |  |   | 329,669 |   |
| Costof operations – paratransit and transitoperations |  |  |                          |   | 51,060  |      |  |  |      |   | 40,694  |      |  |  |      |   | 35,034  |   |  |  |  |   | 38,491  |   |  |  |  |   | 39,474  |   |
| Generalandadministrative                                    |  |  |                          |   | 21,557  |      |  |  |      |   | 17,524  |      |  |  |      |   | 17,695  |   |  |  |  |   | 17,457  |   |  |  |  |   | 18,655  |   |
| Depreciationandamortization                                 |  |  |                          |   | 25,072  |      |  |  |      |   | 25,055  |      |  |  |      |   | 26,287  |   |  |  |  |   | 25,029  |   |  |  |  |   | 28,199  |   |
| Contractrightsimpairment                                    |  |  |                          |   | 2,828   |      |  |  |      |   | — |      |  |  |      |   | 5,463   |   |  |  |  |   | 959     |   |  |  |  |   | — |   |
| Income(loss) fromoperations                                 |  |  |                          |   | (18,006 | )    |  |  |      |   | 5,271   |      |  |  |      |   | (6,603  | ) |  |  |  |   | (17,168 | ) |  |  |  |   | (1,939  | ) |
| Otherincome(expense):                                       |  |  |                          |   |    |      |  |  |      |   |    |      |  |  |      |   |    |   |  |  |  |   |    |   |  |  |  |   |    |   |
| Interestexpense(1)                                          |  |  |                          |   | (24,303 | )    |  |  |      |   | (12,868 | )    |  |  |      |   | (25,196 | ) |  |  |  |   | (23,514 | ) |  |  |  |   | (25,941 | ) |
| Reorganizationcosts(2)                                      |  |  |                          |   | — |      |  |  |      |   | (8,164  | )    |  |  |      |   | (11,177 | ) |  |  |  |   | (565    | ) |  |  |  |   | (569    | ) |
| Forgivenessof indebtednessincome(3)                         |  |  |                          |   | — |      |  |  |      |   | — |      |  |  |      |   | 101,493 |   |  |  |  |   | — |   |  |  |  |   | — |   |
| Other                                                       |  |  |                          |   | (1,585  | )    |  |  |      |   | (234    | )    |  |  |      |   | (142    | ) |  |  |  |   | (1,096  | ) |  |  |  |   | (1,100  | ) |
| Income(loss) before income taxes and discontinuedoperations |  |  |                          |   | (43,894 | )    |  |  |      |   | (15,996 | )    |  |  |      |   | 58,375  |   |  |  |  |   | (42,344 | ) |  |  |  |   | (29,549 | ) |
| Benefitfrom (provision for) incometaxes                     |  |  |                          |   | (248    | )    |  |  |      |   | (307    | )    |  |  |      |   | (477    | ) |  |  |  |   | 214     |   |  |  |  |   | — |   |
| Income(loss) before discontinuedoperations                  |  |  |                          |   | (44,142 | )    |  |  |      |   | (16,302 | )    |  |  |      |   | 57,898  |   |  |  |  |   | (42,130 | ) |  |  |  |   | (29,549 | ) |
| (Loss)from discontinuedoperations                           |  |  |                          |   | (13,283 | )    |  |  |      |   | (4,201  | )    |  |  |      |   | (1,080  | ) |  |  |  |   | (296    | ) |  |  |  |   | (2      | ) |
| Netincome(loss)                                             |  |  |                          | $ | (57,425 | )    |  |  |      | $ | (20,503 | )    |  |  |      | $ | 56,818  |   |  |  |  | $ | (42,426 | ) |  |  |  | $ | (29,551 | ) |
|                                                             |

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|                                  |  |  |                       |   |         |      |  |  |      |   |         |      |  |  |      |   |         |  |  |  |  |   |         |  |  |  |  |   |         |   |
|----------------------------------|--|--|-----------------------|---|---------|------|--|--|------|---|---------|------|--|--|------|---|---------|--|--|--|--|---|---------|--|--|--|--|---|---------|---|
|                             |  |  | Asof June30,          |
|                             |  |  | 2002                  |   |         | 2003 |  |  | 2004 |   |         | 2005 |  |  | 2006 |
|                             |  |  | (Dollarsin thousands) |
| Balance SheetData:               |  |  |                       |   |    |      |  |  |      |   |    |      |  |  |      |   |    |  |  |  |  |   |    |  |  |  |  |   |    |   |
| Cashand cashequivalents          |  |  |                       | $ | 3,604   |      |  |  |      | $ | 3,101   |      |  |  |      | $ | 3,742   |  |  |  |  | $ | 6,835   |  |  |  |  | $ | 501     |   |
| Accountsreceivable,net           |  |  |                       |   | 57,674  |      |  |  |      |   | 55,519  |      |  |  |      |   | 46,971  |  |  |  |  |   | 44,832  |  |  |  |  |   | 46,085  |   |
| Property,plant and equipment,net |  |  |                       |   | 166,619 |      |  |  |      |   | 154,263 |      |  |  |      |   | 149,078 |  |  |  |  |   | 124,899 |  |  |  |  |   | 93,478  |   |
| Totalassets                      |  |  |                       |   | 292,428 |      |  |  |      |   | 277,995 |      |  |  |      |   | 256,330 |  |  |  |  |   | 247,005 |  |  |  |  |   | 213,426 |   |
| Totaldebt                        |  |  |                       |   | 253,672 |      |  |  |      |   | 250,497 |      |  |  |      |   | 139,041 |  |  |  |  |   | 166,460 |  |  |  |  |   | 163,048 |   |
| Shareholder'sequity(deficit)     |  |  |                       |   | (16,359 | )    |  |  |      |   | (36,694 | )    |  |  |      |   | 66,480  |  |  |  |  |   | 24,977  |  |  |  |  |   | (33     | ) |
|                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Contractualinterest was $26.6 million and $32.6 million for theperiods ended June 30, 2003 and June 30, 2004,respectively. |

|     |                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Reorganization costs consistprimarily of fees for both our restructuring advisors and ourcreditors' restructuring advisors and legal counsel. |

|     |                                                                                                                                                                                                                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | As a result of our plan of reorganization becomingeffective, liabilities that were subject to compromise were settled,which resulted in the recognition of forgiveness of indebtedness incomebased upon the estimated settlement amounts. (See Note 3 of Notes toConsolidated Financial Statements included elsewhere in this Form10-K) |

|               |                                                                                            |
|---------------|--------------------------------------------------------------------------------------------|
| Item 7.  | Management’sDiscussion and Analysis of Financial Condition and Results ofOperations. |

The following discussion should be read inconjunction with the ‘‘Selected Form FinancialData’’ and our historical consolidated financialstatements, including the notes thereto, included elsewhere in thisForm 10-K.

General

We are the fourth largestprovider of school bus transportation in the United States and theleading provider in New York City, the largest market in which weoperate. We have contracts with 126 school districts in New York,Missouri, Massachusetts, California, Pennsylvania, New Jersey andIllinois. For fiscal year 2006, we had a contract to provideparatransit services in New York City to physically and mentallychallenged passengers who are unable to use standard publictransportation. We also provide other transportation services,including fixed route transit, express commuter line and charter andtour buses through our coach services. As of June  30,2006, we operated a fleet of approximately 6,000 vehicles operatingfrom 58 facilities.

School bus transportation services accountedfor 88.4%, 87.9% and 88.9% of our revenues fromcontinuing operations in our fiscal years ended June 30, 2004,2005 and 2006, respectively. Our school bus transportation contractshave provided a relatively predictable and stable stream of revenuesover their terms, which generally range from one to five years. Since1979, we have achieved substantial contract renewals, which we believeis due to (1) our reputation for passenger safety and providingefficient, on-time service, (2) our long standing relationshipswith the school districts we service, (3) the preference ofschool districts to maintain continuity of service with their currentproven contractor rather than risk the uncertainty associated with areplacement and (4) the disadvantage of prospective competitors,who generally would have to make substantially greater investments thanwe would in new equipment and who may experience difficulty obtainingsuitable parking and maintenance facilities in our primary markets,especially in the New York City greater metropolitan area.

Thedaily price charged per vehicle varies, depending upon a wide range offactors including (1) vehicle type (standard school buses,minivans, or vehicles with wheelchair lifts), (2) the nature ofservice to be provided (transportation of regular enrollment studentsor transportation of physically or mentally challenged students),(3) special requirements of a particular school districtconcerning age of vehicles and/or upgrades on equipment and(4) the cost of labor. Salaries and related labor costs are

23

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the most significant factors in our coststructure. In urban areas, particularly those with a strong unionpresence, the cost of providing school bus transportation issubstantially greater than in suburban and rural areas, where salariesare generally lower. As a result, prices paid by school districts varyaccordingly.

School bus transportation revenues havehistorically been seasonal, based on the school year and holidayschedules. During the months of September through June, our fleet ofschool buses has been generally fully utilized. Historically, duringthe summer months, only a portion of our school buses have beenrequired to fulfill our summer contracts for school and camp activitiesand special trips.

The paratransit and transit servicesoperations accounted for 11.6%, 12.1%, and 11.1%of our revenues from continuing operations in fiscal years 2004, 2005and 2006, respectively. The terms of our paratransit contractsinitially range from one to five years. The contracts are awarded bypublic transit systems through a public bidding or RFP process. We aregenerally entitled to a specified charge per hour of vehicle servicetogether with other fixed charges. The method of contract compensationalso varies.

The principal elements of our cost of operationsare labor and related employment expenses, fuel, parts, vehicleinsurance, workers' compensation insurance and rent.Historically, the vast majority of our cost of operations have varieddirectly in proportion to revenues. As of June  30,  2006,approximately 77% of our employees were members of various laborunions. We were party to thirty collective bargaining agreements, ofwhich four agreements, excluding Local 1181, covering approximately 340employees, have already expired, eight agreements, coveringapproximately 2,150 employees, will expire over the next two years,with the remainder to expire over the next three to five years..Although no assurance can be given, we do not believe that theexpiration of such collective bargaining agreements will have amaterial adverse effect on our labor costs. No assurance can be givenas to the outcome of negotiations with the representatives of theunionized employees.

General and administrative expenses includecosts primarily associated with our headquarters in Staten Island, NewYork, as well as terminal offices and managerial salaries. We believethat we currently have sufficient staff to support anticipated revenuelevels. Cost increases are anticipated to be offset somewhat as ourbusiness grows and we realize economies of scale by spreading the costof the administrative staff and facilities over a larger revenuebase.

We have closed our two bus sales operations and have soldthe remaining assets in September  2004. We have treated this asdiscontinued operations for all periods presented, which we consider tobe non-core businesses. Our discontinued operations generatedapproximately $1.1 million in losses in fiscal year 2004, whichincluded $1.4 million of forgiveness of indebtedness income. Forthe fiscal years ended June  30,  2005 and 2006 loss fromdiscontinued operations was $0.3  million and $0,respectively.

Results ofOperations(1)

|                                        |  |  |                     |   |       |      |  |  |      |  |       |    |  |  |  |   |       |   |  |  |  |  |       |    |  |  |  |   |       |   |  |  |  |  |       |    |
|----------------------------------------|--|--|---------------------|---|-------|------|--|--|------|--|-------|----|--|--|--|---|-------|---|--|--|--|--|-------|----|--|--|--|---|-------|---|--|--|--|--|-------|----|
|                                   |  |  | YearEnded June30,   |
|                                   |  |  | 2004                |   |       | 2005 |  |  | 2006 |
|                                   |  |  | (Dollarsinmillions) |
| Revenues                               |  |  |                     | $ | 363.5 |      |  |  |      |  | 100.0 | %  |  |  |  | $ | 363.7 |   |  |  |  |  | 100.0 | %  |  |  |  | $ | 414.1 |   |  |  |  |  | 100.0 | %  |
| Costofoperations                       |  |  |                     |   | 320.7 |      |  |  |      |  | 88.2  | %  |  |  |  |   | 337.4 |   |  |  |  |  | 92.8  | %  |  |  |  |   | 369.1 |   |  |  |  |  | 89.2  | %  |
| Generalandadministrative               |  |  |                     |   | 17.7  |      |  |  |      |  | 4.9   | %  |  |  |  |   | 17.5  |   |  |  |  |  | 4.8   | %  |  |  |  |   | 18.7  |   |  |  |  |  | 4.5   | %  |
| Depreciationandamortization            |  |  |                     |   | 26.3  |      |  |  |      |  | 7.2   | %  |  |  |  |   | 25.0  |   |  |  |  |  | 6.9   | %  |  |  |  |   | 28.2  |   |  |  |  |  | 6.8   | %  |
| Income(loss) from continuingoperations |  |  |                     |   | (6.6  | )    |  |  |      |  | (1.8  | )% |  |  |  |   | (17.2 | ) |  |  |  |  | (4.7  | )% |  |  |  |   | (1.9  | ) |  |  |  |  | (0.5  | )% |
| Interestexpense                        |  |  |                     |   | 25.2  |      |  |  |      |  | 6.9   | %  |  |  |  |   | 23.5  |   |  |  |  |  | 6.5   | %  |  |  |  |   | 25.9  |   |  |  |  |  | 6.3   | %  |
|                                        |

|  |
|--|
|  |  |
|  |

|     |                                            |
|-----|--------------------------------------------|
| (1) | Allfigures are from continuing operations. |

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Fiscal year ended June  30,2006 Compared to Fiscal year ended June  30,2005

Revenues.    Revenues from school bus operationswere $368.1 million for the year ended June  30,2006 compared to $319.6 million for the year ended June30,  2005, an increase of $48.5 million, or 15.2%.This increase was due to $19.9  million of price increases dueprimarily to the new DOE contract (excluding increases in DOE escortrevenue), and service requirement increases of $14.7  million dueprimarily to additional routes in New York City, offset by $3.3million in lost contracts. In addition, under the terms of its currentcontract with the DOE, the Company receives full reimbursement of allescort costs, plus a five percent administrative fee. This changeincreased revenue by $17.2  million.

Revenues fromparatransit and transit operations were $46.0 million for theyear ended June  30,  2006 compared to $44.1 millionfor the year ended June  30,  2005, an increase of$1.9  million, or 4.4%. This increase was due primarily to$5.3  million of price increases and increases in servicerequirements from existing contracts, partially offset by $2.5million in lost contracts and $0.9  million reduction in revenuein connection with customer reimbursement of fuel charges for the yearended June  30,  2005, compared to the year endedJune  30,  2006 when the customer provided its ownfuel.

Cost of Operations.    Cost of operations ofschool bus operations were $329.7  million for the year endedJune  30,  2006 compared to $298.9  million for theyear ended June  30,  2005, an increase of$30.8 million, or 10.3%. Salaries and wages were$181.4  million for the year ended June  30,  2006compared to $168.5  million for the year ended June30,  2005, an increase of $12.8 million, or 7.6%.This increase was primarily due to more employees needed to serviceadditional routes and an increase in payroll days in New York City. Asa percentage of revenues, salaries and wages decreased to 49.3%for the year ended June  30,  2006, from 52.7% forthe year ended June  30,  2005. Employee fringe benefitsincreased $4.5 million for the year ended June  30,2006. The increase was due primarily to $5.1  million increasesin health and welfare costs primarily due to higher reserverequirements and an increase of $1.3  million payroll taxes dueto higher wages offset partially by a $1.9  million decrease inworkers’ compensation. Fuel expense increased $4.8million, vehicle lease expense increased $4.1  million due to theCompany meeting its new vehicle requirements by leasing these vehicles,rent expense increased $1.7  million, primarily due to thesale-leaseback transactions, liquidated damages increased $1.1million and vehicle insurance increased $0.7  million for theyear ended June  30,  2006, compared to the year endedJune  30,  2005. As a percentage of revenues, cost ofoperations decreased to 89.6% for the year ended June30,  2006, from 93.5% for the year ended June30,  2005.

Cost of operations of paratransit and transitoperations were $39.5 million for the year ended June30,  2006 compared to $38.5 million for the year endedJune  30,  2005, an increase of $1.0 million, or2.6%. This increase was primarily due to an increase in salariesand fringe benefits. As a percentage of revenues, cost of operationsdecreased to 85.8% for the year ended June  30,2006, from 87.3% for the year ended June  30,2005.

General and administrative expenses.    Generaland administrative expenses from school bus operations were$16.4  million for the year ended June  30,  2006compared to $15.0  million for the year ended June30,  2005, an increase of $1.3  million or 8.8%.This increase was primarily due to a $1.0  million increase inadministrative payroll and fringe benefits, including a $0.5million contract renewal bonus paid to certain executives in relationto the extension agreement with the DOE and $0.2  million inexecutive severance pay. Professional fees increased $0.8million, including $0.5  million in costs for acquiring vehiclelease facilities. These increases were partially offset by a reductionin bad debt expense of $0.6  million. As a percentage of schoolbus operations revenues, general and administrative expenses decreasedto 4.4% for the year ended June  30,  2006, from4.7% for the year ended June  30,2005.

General and administrative expenses from paratransit andtransit operations were $2.3  million for the year endedJune  30,  2006 compared to $2.4  million for theyear ended June  30,  2005, a decrease of $0.1million, or 0.5%. This decrease was primarily due to reductionsin administrative payroll and fringe benefits as a result of a lostcontract. As a percentage of paratransit and transit operationsrevenues, general and administrative expenses decreased to 5.0%for the year ended June  30,  2006, from 5.5% forthe year ended June  30,  2005.

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Depreciation andamortization.    Depreciation and amortization expense fromschool bus operations was $26.6 million for the year endedJune  30,  2006 compared to $23.9 million for theyear ended June  30,  2005, an increase of$2.7 million, or 11.1%. This increase was primarily dueto $5.7  million impairment charges on fixed assets partiallyoffset by $3.0  million lower depreciation expense as some of theequipment is now fully depreciated and the current fiscal year’svehicle requirements were financed with operating leases.

Depreciation and amortization expense from paratransit and transitoperations was $1.6 million for the year ended June30,  2006 compared to $2.1 million for the year endedJune  30,  2005, a decrease of $0.5 million, or21.5%. This decrease was due to lower depreciation expense assome of the equipment is now fully depreciated and the current fiscalyear’s vehicle requirements were financed with operatingleases.

Operating income (loss) fromoperations.    Operating loss from school bus operations was$4.5  million for the year ended June  30,  2006compared to $18.2 million loss for the year ended June30,  2005, a decrease in loss of $13.7 million, or75.2%, due to the net effect of the items discussedabove.

Operating income from paratransit and transit operationswas $2.6 million for the year ended June  30,  2006compared to $1.1 million for the year ended June30,  2005, an increase of $1.5  million, or 140.7%,due to the net effect of the items discussed above.

Interestexpense.    Interest expense was $25.9  million for theyear ended June  30,  2006 compared to $23.5 millionfor the year ended June  30,  2005, an increase of$2.4 million, or 10.3%. The increase was primarily due to$1.3  million in interest expense on our $15.0  million of10% third priority senior secured notes due 2008 (the‘‘Additional Indebtedness’’), $0.1million of higher interest rates on our $10.0  million seniorsecured floating rate notes due 2008 (the ‘‘FloatingNotes’’), a $0.5  million increase in interestexpense on our senior credit facility, due primarily to higher interestrates and a $0.7  million increase in deferred financingexpenses.

Reorganization costs.    Reorganizationcosts were $0.6  million for the years ended June30,  2006 and 2005.

Loss before benefit from (provisionfor) income taxes and discontinued operations.    Due to thenet effect of the items discussed above, we experienced a loss beforebenefit from (provision for) income taxes and discontinued operationsof $29.5  million for the year ended June  30,  2006,compared to a loss of $42.3  million for the year endedJune  30,  2005, a decrease in loss of$12.8 million.

Fiscal year ended June  30,2005 Compared to Fiscal year ended June  30,2004

Revenues.    Revenues from school bus operationswere $319.6  million for the year ended June  30,2005 compared to $321.5  million for the year ended June30,  2004, a decrease of $1.9  million, or 0.6%.This decrease was due to the net effect of lost contracts of$14.2  million, primarily the contract with the St. Louis Boardof Education, and a $0.6  million decrease in servicerequirements in existing contracts. These decreases were partiallyoffset by $12.5  million of price increases of existing contractsand $0.5  million in new contracts.

Revenues fromparatransit and transit operations were $44.1  million for theyear ended June  30,  2005 compared to $42.1  millionfor the year ended June  30,  2004, an increase of$2.0  million, or 4.8%. This increase was primarily due to$5.0  million of price increases and increases in servicerequirements from existing contracts, partially offset by $3.0million of lost contracts.

Cost of Operations.    Costof operations of school bus operations were $298.9  million forthe year ended June  30,  2005 compared to $285.6million for the year ended June  30,  2004, an increase of$13.3  million, or 4.6%. This increase was primarily dueto an increase of $6.7  million in employee fringe benefits, anincrease of $3.8  million in fuel costs due to higher fuelprices, $1.6  million in vehicle lease expense and $0.7million in salaries and wages. As a percentage of revenues, employeefringe benefits increased to 20.0% for the year endedJune  30,  2005 compared to 17.8% for the year endedJune  30,  2004. As a percentage of revenues, fuel costsincreased to 5.0% for the year ended June  30,  2005compared to 3.8% for the year ended June  30,2004.

26

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Cost of operations of paratransit andtransit operations were $38.5  million for the year endedJune  30,  2005 compared to $35.0  million for theyear ended June  30,  2004, an increase of $3.5,million or 9.9%. This increase was primarily due to a$2.3  million increase in labor costs and a $0.9  millionincrease in employee fringe benefits. As a percentage of revenues,employee fringe benefits increased to 13.6% for the year endedJune  30,  2005 compared to 12.1% for the year endedJune  30,  2004. As a percentage of revenues, salaries andwages increased to 50.9% for the year ended June30,  2005 compared to 47.8% for the year ended June30,  2004.

General and administrativeexpense.    General and administrative expenses from school busoperations were approximately $15.0  million for the year endedJune  30,  2005 and for the year ended June30,  2004. As a percentage of school bus operations revenues,general and administrative expenses were 4.7% for both the yearsended June  30,  2005 and 2004.

General andadministrative expenses from paratransit and transit operations were$2.4  million for the year ended June  30,  2005compared to $2.6  million for the year ended June30,  2004, a decrease of $0.2  million, or 6.3%,primarily due to lower payroll and fringe benefit costs. As apercentage of paratransit and transit revenues, general andadministrative expenses decreased to 5.5% for the year endedJune  30,  2005 from 6.1% for the year endedJune  30,  2004.

Depreciation andamortization.    Depreciation and amortization expense fromschool bus operations was $22.9  million for the year endedJune  30,  2005 compared to $23.5  million for theyear ended June  30,  2004, a decrease of $0.6million, or 2.6%. An impairment charge of $5.5  millionwas taken against transportation rights in June  2004 to adjustthe value of these rights to fair value, which resulted in decreasedamortization expense of $0.8  million for transportation contractrights for the year ended June  30,2005.

Depreciation and amortization expense from paratransit andtransit operations was $2.1  million for the year endedJune  30,  2005 compared to $2.7  million for theyear ended June  30,  2004, a decrease of $0.7million, primarily due to lower depreciation expense in the fiscal year2005, as some of the equipment is now fullydepreciated.

Contract rightsimpairment.    Transportation contract rights primarilyrepresent the value the Company assigned to the cost of investments inschool bus companies in excess of book value of the companies acquired.In addition, the Company has purchased from unrelated third partiescertain transportation contract rights with respect to revenuecontracts and travel routes. Using EBITDA as a measurement tool, theCompany reviews the financial performance of its subsidiary buscompanies that have transportation contract rights annually. If thisreview indicates that the transportation contract rights are likely tobe impaired in value, the Company projects the future undiscounted cashflows attributable to such subsidiary bus company and compares it tothe carrying value of the transportation contract rights assets. Themajor impacts to the future undiscounted cash flows are either areduction of service requirements (e.g., routes) that decrease revenue,an increase in costs and expenses at a rate greater than thecorresponding contractual revenue increase, or a combination of bothfactors. If this comparison indicates that the future undiscounted cashflows attributable to the underlying assets are unlikely to exceed thecarrying value of the transportation contract rights, an impairmentcharge is taken based on the difference between the estimated futurecash flows, determined to be the estimated fair value, and the carryingvalue of the transportation contract rights. Using this methodology, itwas determined that an impairment charge of $1.0  million for thefiscal year ended June  30,  2005, was necessary to adjustthe transportation contract rights to fair value. Similarly, a$5.5  million of impairment charge was required for the yearended June  30,  2004. The majority of the impairmentcharges in both fiscal years ended June  30,  2004 and 2005were in subsidiary bus companies in Massachusetts. Transportationcontract rights are amortized on a straight-line basis over atwelve-year period, which represents the Company’s estimate ofthe average length of the contracts and expected renewalperiods.

27

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Income (loss) fromoperations.    Operating loss from school bus operations was$18.2  million for the year ended June  30,  2005compared to $8.3  million for the year ended June30,  2004, an increase in loss of $10.3  million, or119.8%, due to the net effect of the items discussedabove.

Income from operations from paratransit and transitoperations was $1.1  million for the year ended June30,  2005 compared to $1.7  million for the year endedJune  30,  2004, a decrease of $0.6  million, or37.9%, due to the net effect of the items discussedabove.

Interest expense.    Interest expense fromcontinuing operations was $23.5  million for the year endedJune  30,  2005 compared to $25.2  million for theyear ended June  30,  2004, a decrease of $1.7million, or 6.7%. The decrease was primarily due to a$4.8  million reduction in interest expense on theCompany’s exit senior credit facility and the Company’snew senior credit facility due to lower average borrowing balances, a$6.0  million decrease in deferred financing expenses and areduction of $4.7  million in interest on the Company’sexit financing senior secured notes due 2006, which was fully paid inApril  2004. These decreases were partially offset by an increaseof $12.1  million in interest expense on $115.0  million inaggregate principal amount of the Company’s senior secured notesdue 2008, which were issued in April  2004, $0.6  millionin interest on $15.0  million of third priority senior securednotes due 2008, which were issued in March  2005, and a$0.7  million increase due to interest on the GSC Note. Interestexpense excludes certain contractual interest of $6.5  millionfor the year ended June  30,  2004, as those amounts werenot recorded as interest expense in accordance with the AICPA’sStatement of Position 90-7, Financial Reporting by Entities inReorganization under the Bankruptcy Code.

Reorganizationcosts.    Reorganization expenses were $0.6  million forthe year ended June  30,  2005 compared to $11.2million for the year ended June  30,  2004, a decrease of$10.6  million. These expenses were primarily from fees of theCompany’s legal counsel.

Otherexpense.    Other expenses were $1.1  million for theyear ended June  30,  2005 compared to $0.1  millionfor the year ended June  30,  2004, an increase of$1.0  million or 673.4%. The increase was primarily due toan increase in loss on the sale of vehicles.

Forgiveness ofindebtedness income.    As a result of the Debtors’ planof reorganization becoming effective, the Bankruptcy Court dischargedsecured and unsecured debt, trade and other miscellaneous claims andaccrued interest, which resulted in the Company’s recognition of$101.5  million of forgiveness of indebtedness income fromcontinuing operations for the year ended June  30,2004.

Income (loss) before benefit from (provision for) incometaxes and discontinued operations.    Due to the net effect ofthe items discussed above, the Company experienced a loss beforeprovision for income taxes and discontinued operations of $42.3million for the year ended June  30,  2005 compared toincome before provision for income taxes and discontinued operations of$58.4  million for the year ended June  30,  2004,which, after excluding $101.5  million of forgiveness ofindebtedness income, would have resulted in a loss of $43.1million for the year ended June  30,  2004, a decrease inloss of $0.8  million.

Benefit from (provision for)income taxes.    Benefit from income taxes were $0.2million for the year ended June  30,  2005 compared to aprovision for income taxes of $0.5  million for the year endedJune  30,  2004, a decrease of $0.7  million, or144.9%. This decrease was attributable to a decrease in deferredstate income tax expense. The Company’s estimated effective taxrate of 0.5% for the year ended June  30,  2005differs from the federal statutory rate of 34% primarily becauseof a decrease in the valuation allowance. The valuation allowanceincreased in fiscal year 2005 as a result of the reduction of theCompany’s gross deferred tax assets, which primarily resultedfrom the increase in net operating loss and tax creditcarry-forwards.

Liquidity and Capital Resources

Thestatements regarding the Company’s anticipated capitalexpenditures and service requirements are ‘‘forwardlooking’’ statements which involve unknown risks anduncertainties, such as the Company’s ability to meet or exceedits growth plans and/or available financing, which may cause actualcapital expenditures to differ materially from currently anticipatedamounts.

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On November  2,  2005, theCompany amended its receivable agreement with Wachovia Bank, NationalAssociation (‘‘Wachovia’’), to sellWachovia, without recourse, up to a maximum $8.2  million(previously $5.9  million) of accounts receivable (the‘‘Amended Receivable Agreement’’). Thisincreased amount is available to the Company from November2,  2005 through July  1,  2006, at which time themaximum receivables to be sold will revert back to the $5.9million. The President and Chief Executive Officer of the Companyincreased his existing personal guarantee in full support of theAmended Receivable Agreement and received an additional $50,000guarantee fee. As of June  30,  2006, the Company had soldapproximately $7.5  million of gross receivables and as ofSeptember  15,  2006, the Company had no sold receivables.Due to the increase in our senior credit facility (See Note 20 of Notesto Consolidated Financial Statements included elsewhere in this Form10-K) the Company feels that the $5.9  million line issufficient.

The Company operated a fleet of approximately 6,000vehicles as of June  30,  2006 and consumes substantialquantities of fuel for its operations. Based on the Company’scurrent operations, an increase in fuel costs of 10 cents per gallonwill increase its cost of fuel purchased by approximately $1.0million on an annual basis.

The Company’s capitalexpenditures for the fiscal years ended June  30,  2006 and2005 totaled $6.5  million and $8.2  million (primarilynon-vehicle capital expenditures), respectively. The Companyanticipates approximately $5.0  million of non-vehicle capitalexpenditures for the fiscal year ended June  30,  2007 andplans to meet its vehicle requirements by leasing these vehicles as itdid for the fiscal year ended June  30,  2006. Vehiclelease expense increased $4.1  million for the year endedJune  30,  2006 from the year ended June  30,2005. The Company anticipates its vehicle lease expense will increaseapproximately $6.7  million for the fiscal year endingJune  30,  2007.

On October  17,  2005,the Company sold 293,663 shares of its common stock, par value $.01 pershare, to AETG, for an aggregate purchase price of $4.9  million.The Company is a wholly-owned subsidiary of AETG. AETG obtained$3.7  million of the $4.9  million investment from GSC and$1.2  million from the holder of the Additional Indebtedness. Theshares were sold in a private placement exempt from registration underthe Securities Act of 1933 pursuant to Section 4 (2) thereof.

OnApril  26,  2005, Metro Affiliates, Inc. a subsidiary ofthe Company sold a facility for a gross purchase price of $4,460,000and leased back the same property for a period of approximately twentyyears. The triple net lease, which is being accounted for as anoperating lease, calls for monthly payments of $36,667 with annualincreases of two percent. The gain on the transaction was $2,465,150and is being amortized over the leaseback period on a straight-linebasis.

On July 6, 2005, 201 West Sotello Realty Inc., asubsidiary of the Company, completed the sale and leaseback of itsowned real property located in Los Angeles, California. The saleand leaseback was pursuant to the Agreement and Escrow Instructions forPurchase of Real Estate (the ‘‘Agreement and EscrowInstructions’’) with S.R. Partners (the‘‘Buyer’’). Pursuant to theAgreement and Escrow Instructions, 201 West Sotello Realty Inc. sold tothe Buyer its owned real property located in Los Angeles, Californiafor a gross purchase price of $5,000,000. In connection with thesale of the property, Atlantic Express of L.A. Inc., a subsidiary ofthe Company, agreed to leaseback the premises from the Buyer for a termof approximately ten years. The triple net lease called for amonthly payments of $39,583 with annual increases of2.5%. Atlantic Express of L.A. Inc. is responsible forall real property taxes and certain insurance costs under the lease.The gain on this transaction was $737,268 and is being amortized overthe leaseback period on a straight-line basis.

OnJanuary 11, 2006, Midway Leasing, Inc.(‘‘MidwayLeasing’’) a subsidiary of the Company, completed thesale and leaseback of its owned real property located in Staten Island,New York. Pursuant to the Contract of Sale, Midway Leasing soldto the purchaser its owned real property in Staten Island, New York fora gross purchase price of $4,200,000. In connection with thesale of the real property, the Company agreed to leaseback the premisesfrom the purchaser for a term of 10 years. The lease calls formonthly payments of $29,750 with annual increases of 2.0%. TheCompany is responsible for all real property taxes, certain insurancecosts and utilities. The Company incurred a loss on the sale ofapproximately $0.9  million.

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Beginning February  6,  2006,the DOE increased the number of routes under the Company’scontract by approximately 140 routes. This was a result of theDOE’s new contract with the United Federation of Teachers(‘‘UFT’’). This resulted in approximately$6.5  million additional revenue for the year ended June30,  2006 and will result in approximately $13.5  millionof revenue for the fiscal year ending June  30,2007

On March  31,  2006 the holders of a majority inprincipal amount of the Company’s Notes consented to amendmentsto the Indenture which (i) amended the definition of the term‘‘Asset Sale’’ to exclude the sale ofaccounts receivable; (ii) amended the definition of the term‘‘Permitted Indebtedness’’ to increase thesize of the permitted bank debt basket from $20.0  million to$30.0  million effective September  25,  2006; (iii)amended the ‘‘Limitation on Asset Sales’’covenant to require the Company to apply 80% of net cashproceeds in excess of $10.0  million from asset sales occurringafter the date of the Supplemental Indenture to offer to repurchase theNotes and the Third Priority Notes; (iv) amended the‘‘Maintenance of Consolidated EBITDA’’covenant such that it will not apply until the four consecutivequarters ending December  31,  2006 and will requireminimum ‘‘Consolidated EBITDA’’, as definedin the Indenture governing the Notes, of $23.0  million. Theholders of Third Priority Secured Notes also consented to the samechanges as the changes contained in the Supplemental Indenture.

The Company’s level of indebtedness may make it moredifficult for it to satisfy its obligations with respect to the Notesbecause a substantial portion of the Company’s cash flow fromoperations will be dedicated to debt service payments. Accordingly, theCompany’s cash flow availability to fund increases in workingcapital and capital expenditures may be restricted, as will itsflexibility in planning for, or reacting to, changes in its business,industry or general adverse economic conditions.

On July27,  2006, T-NT, a subsidiary of the Company, completed the saleof substantially all of its assets. Pursuant to the Contract of Sale,T-NT sold substantially all of its assets for a gross purchase price of$12.6  million. In addition, Domenic Gatto received $100,000 asconsideration for entering into a five-year non-competition agreement.The Company will recognize a gain on the sale of these assets of$5.8  million in the first quarter of fiscal year 2007.

The Company believes that due to increased revenues and relatedworking capital requirements, it will need a $10.0  millionincrease in its senior credit facility for the year ending June30,  2007. The terms of our Supplemental Indenture permit thisincrease (see above) and on September  19,  2006, thesenior lender approved an increase in the facility by $10.0million. In addition, the senior lender approved an extension of thefacility to February  29,  2008.

On August4,  2004, the Company received $4.9  million from GSC andsigned a senior unsecured note (the‘‘Note’’) that matures on April23,  2007. On October  17,  2005, the Note wasassigned to the holder of the Company’s $15.0  millionthird priority secured note due 2008. Pursuant to the terms of asubordination agreement signed by the holder of the Note and theCompany’s senior secured lender, the right to payment andsatisfaction of the Note is subordinated until the payment in full ofour senior credit facility, including any renewal or extension thereof.However, failure to pay the note upon maturity would constitute adefault under the note and a default under our senior credit facility.The holder of the Note has informed the Company that they will extendthe maturity date of the Note to the new maturity date of our seniorcredit facility.

The Company, in addition to normal workingcapital requirements, has significant interest obligations and capitalexpenditure requirements to finance its operations. In addition, theCompany uses substantial amounts of fuel in its operations. Significantincreases in the cost of fuel will have a material effect on itsoperations. The Company believes that the borrowings under its seniorcredit facility with the increase in its senior credit facility, theproceeds from sales under its receivable agreement, the proceeds fromthe sale of T-NT, together with its existing cash and cash flow fromoperations and the continuing effect of its extension agreement withthe DOE will be sufficient to fund the Company’s anticipatedliquidity requirements for the next fiscal year.

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As of June  30,  2006, totalcurrent assets were $94.2  million and total current liabilitieswere $68.5  million. At June  30,  2006, theCompany’s debt under its $20.0  million senior creditfacility was $17.8  million, including the $3.5  millionsupplemental loan, and it had $2.2  million of borrowingavailability, based on the Company’s borrowing basecalculations. The Company’s letter of credit line was fullyutilized. On September  15,  2006, the Company’sdebt under our senior credit facility was $8.0  million(including the $3.5  million supplemental loan), and it had$8.1  million in borrowing availability, based upon theCompany’s borrowing base calculations. On September15,  2006, the Company had $115.0  million outstanding ofthe Notes and $15.0  million outstanding of the AdditionalIndebtedness.

Net cash used in operatingactivities.    Net cash used in operating activities was$10.4  million for the year ended June  30,  2006,resulting primarily from a use of cash due to changes in the componentsof working capital of $8.5  million (primarily an increase inprepaid expenses of $4.0  million and a decrease in controlleddisbursements of $2.5  million) and $33.8  million used inoperating activities, partially offset by $31.9  million ofnon-cash items of depreciation and amortization ($26.2  million)and fixed asset impairment ($5.7  million).

Net cash usedin operating activities was $13.2  million for the year endedJune  30,  2005, resulting primarily from $43.2million used in operating activities, partially offset by changes inthe components of working capital of $1.0  million (primarily anincrease in accounts payable and controlled disbursements of$5.3  million and a decrease in accounts receivable of$1.8  million and restricted cash of $1.1  million,partially offset by prepaid insurance of $7.4  million) and by$29.0  million of non-cash items of depreciation and amortization($28.1  million) and fixed asset impairment ($1.0million).

Net cash provided by investingactivities.    For the year ended June  30,  2006,net cash provided by investment activities was $4.6  millionresulting primarily from the sales and leasebacks of our Los Angeles,California and Staten Island, New York facilities and the sale ofproperty in St. Louis, Missouri, partially offset by the purchase of$1.8  million in transportation contract rights and $6.5million of capital expenditures. Of these, $0.5  million werefinanced with purchase money debt and the balance of capitalexpenditures was financed from operating cash flows. Purchases ofmarketable securities were $3.9  million for the year endedJune  30,  2006 and proceeds of sales or redemption ofmarketable securities were $3.8  million for the correspondingperiod.

For the year ended June  30,  2005, theCompany made $8.2 million of capital expenditures. Of these,$1.1 million of capital expenditures were directly financed withcapital leases, $1.3  million were financed with loans and thebalance of capital expenditures was financed from operating cash flows.These capital expenditures were partially offset from proceeds from thesale of fixed assets of $4.9  million, of which $0.1million repaid loans.

Net cash provided in financingactivities.    Net cash used in financing activities totalled$0.5  million for the year ended June  30,  2006 dueprimarily to $3.3  million in payments on borrowings undercapital leases and purchase money mortgages and $1.7  million netborrowings under our senior credit facility partially offset by$4.9  million in proceeds from the sale of stock.

Net cashprovided by financing activities totalled $18.1 million for theyear ended June  30,  2005 due to $15.0 million ofnew borrowings from the Additional Indebtedness, $4.9 million ofnew borrowings from the GSC Note and $5.1 million net borrowingsunder our senior credit facility. These were partially offset by$3.3 million in payments on borrowings under capital leases andpurchase money mortgages and $3.6 million in deferred financingcosts

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Commitments and ContractualObligations

Our contractual obligations and commitmentsprincipally include obligations associated with our outstandingindebtedness and future minimum operating lease obligations as setforth in the following table.

The following table shows ourcontractual obligations and commitments as of June  30,2006, and the payments due by period.

|                                                                      |  |  |                     |   |             |      |  |  |      |   |            |      |  |  |      |   |             |      |  |  |            |   |            |  |  |  |  |   |            |  |  |  |  |   |           |  |  |  |  |   |            |   |
|----------------------------------------------------------------------|--|--|---------------------|---|-------------|------|--|--|------|---|------------|------|--|--|------|---|-------------|------|--|--|------------|---|------------|--|--|--|--|---|------------|--|--|--|--|---|-----------|--|--|--|--|---|------------|---|
|                                                                 |  |  | Paymentdue byperiod |
|                                                                 |  |  | Total               |   |             | 2007 |  |  | 2008 |   |            | 2009 |  |  | 2010 |   |             | 2011 |  |  | Thereafter |
| Actualpayments:                                                      |  |  |                     |   |        |      |  |  |      |   |       |      |  |  |      |   |        |      |  |  |            |   |       |  |  |  |  |   |       |  |  |  |  |   |      |  |  |  |  |   |       |   |
| 12%Senior securednotes                                               |  |  |                     | $ | 105,000,000 |      |  |  |      | $ | —    |      |  |  |      | $ | 105,000,000 |      |  |  |            | $ | —    |  |  |  |  | $ | —    |  |  |  |  | $ | —   |  |  |  |  | $ | —    |   |
| Floatingrate senior securednotes                                     |  |  |                     |   | 10,000,000  |      |  |  |      |   | —    |      |  |  |      |   | 10,000,000  |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Seniorcreditfacility                                                 |  |  |                     |   | 17,755,702  |      |  |  |      |   | 17,755,702 |      |  |  |      |   | —     |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| GSCSenior unsecurednotes                                             |  |  |                     |   | 4,900,000   |      |  |  |      |   | —    |      |  |  |      |   | 4,900,000   |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Long-termdebt                                                        |  |  |                     |   | 3,480,256   |      |  |  |      |   | 933,939    |      |  |  |      |   | 630,546     |      |  |  |            |   | 690,420    |  |  |  |  |   | 648,854    |  |  |  |  |   | 180,923   |  |  |  |  |   | 395,574    |   |
| Thirdpriority senior securednotes                                    |  |  |                     |   | 15,449,026  |      |  |  |      |   | —    |      |  |  |      |   | 15,449,026  |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Letterof creditadvance                                               |  |  |                     |   | 3,500,000   |      |  |  |      |   | 3,500,000  |      |  |  |      |   | —     |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Capitalleaseobligations                                              |  |  |                     |   | 5,741,152   |      |  |  |      |   | 1,921,269  |      |  |  |      |   | 1,921,269   |      |  |  |            |   | 1,600,811  |  |  |  |  |   | 195,825    |  |  |  |  |   | 101,978   |  |  |  |  |   | —    |   |
| Interestexpense                                                      |  |  |                     |   | 36,265,356  |      |  |  |      |   | 19,447,011 |      |  |  |      |   | 16,521,476  |      |  |  |            |   | 146,335    |  |  |  |  |   | 80,083     |  |  |  |  |   | 43,456    |  |  |  |  |   | 26,995     |   |
| Operatinglease obligations – realproperty                      |  |  |                     |   | 47,814,690  |      |  |  |      |   | 6,253,167  |      |  |  |      |   | 5,380,136   |      |  |  |            |   | 4,943,816  |  |  |  |  |   | 4,704,290  |  |  |  |  |   | 3,878,824 |  |  |  |  |   | 22,654,457 |   |
| Operatinglease obligations – transportation and otherequipment |  |  |                     |   | 39,791,391  |      |  |  |      |   | 9,864,155  |      |  |  |      |   | 9,552,664   |      |  |  |            |   | 7,546,978  |  |  |  |  |   | 6,142,903  |  |  |  |  |   | 4,747,373 |  |  |  |  |   | 1,937,318  |   |
| Managementfees – relatedparties                                |  |  |                     |   | 2,000,000   |      |  |  |      |   | 400,000    |      |  |  |      |   | 400,000     |      |  |  |            |   | 400,000    |  |  |  |  |   | 400,000    |  |  |  |  |   | 400,000   |  |  |  |  |   | (1         | ) |
| Unsecuredcreditors                                                   |  |  |                     |   | 818,296     |      |  |  |      |   | 818,296    |      |  |  |      |   | —     |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Prioritytaxclaims                                                    |  |  |                     |   | 2,618,076   |      |  |  |      |   | 1,310,117  |      |  |  |      |   | 1,307,959   |      |  |  |            |   | —    |  |  |  |  |   | —    |  |  |  |  |   | —   |  |  |  |  |   | —    |   |
| Totalcontractual cashobligations                                     |  |  |                     | $ | 295,533,945 |      |  |  |      | $ | 62,203,656 |      |  |  |      | $ | 171,063,076 |      |  |  |            | $ | 15,328,360 |  |  |  |  | $ | 12,171,955 |  |  |  |  | $ | 9,352,554 |  |  |  |  | $ | 25,014,344 |   |
|                                                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                        |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Themanagement fee related parties has no expiration date and terminatesonly upon the related party ceasing to own of record any shares of thecommon stock issued to them initially pursuant to thePOR. |

AETG and our company have entered into employmentagreements with Domenic Gatto, our Chief Executive Officer andPresident, whose agreement provides for his continued employment withus through December 31, 2008, and Nathan Schlenker, our ChiefFinancial Officer, whose agreement provides for his continuedemployment with us through December 31, 2007. Our totalcontractual obligations under these employment agreements includerequired payments of $928,960 and $778,684, in fiscal year 2007 and2008, respectively. See ‘‘Management—ExecutiveCompensation’’ included elsewhere in this Form 10-K formore information about the terms of these employment agreements.

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

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Quarterly FinancialInformation

The table below sets forth unaudited summaryquarterly financial information for the Company for the last 8quarters. This information has been prepared by the Company on a basisconsistent with its audited Consolidated Financial Statements andincludes all adjustments that management considers necessary for a fairpresentation of the results for suchquarters.

|                             |  |  |                      |   |       |                  |  |  |               |   |       |               |  |  |                   |   |       |                  |  |  |               |   |       |              |  |  |  |   |       |   |  |  |  |   |       |   |  |  |  |   |       |   |  |  |  |   |       |   |
|-----------------------------|--|--|----------------------|---|-------|------------------|--|--|---------------|---|-------|---------------|--|--|-------------------|---|-------|------------------|--|--|---------------|---|-------|--------------|--|--|--|---|-------|---|--|--|--|---|-------|---|--|--|--|---|-------|---|--|--|--|---|-------|---|
|                        |  |  | Fiscalyear 2005      |   |       | Fiscal year2006  |
|                        |  |  | September30, 2004    |   |       | December31, 2004 |  |  | March31, 2005 |   |       | June 30, 2005 |  |  | September30, 2005 |   |       | December31, 2005 |  |  | March31, 2006 |   |       | June 30,2006 |
|                        |  |  | (Dollars inmillions) |
| Revenue                     |  |  |                      | $ | 54.8  |                  |  |  |               | $ | 102.9 |               |  |  |                   | $ | 102.6 |                  |  |  |               | $ | 103.4 |              |  |  |  | $ | 67.3  |   |  |  |  | $ | 109.5 |   |  |  |  | $ | 119.0 |   |  |  |  | $ | 118.2 |   |
| Income(loss) fromoperations |  |  |                      |   | (12.0 | )                |  |  |               |   | 0.2   |               |  |  |                   |   | (1.2  | )                |  |  |               |   | (4.2  | )            |  |  |  |   | (9.4  | ) |  |  |  |   | 2.0   |   |  |  |  |   | 0.9   |   |  |  |  |   | 4.6   |   |
| Netloss                     |  |  |                      |   | (17.9 | )                |  |  |               |   | (6.0  | )             |  |  |                   |   | (7.5  | )                |  |  |               |   | (11.0 | )            |  |  |  |   | (15.8 | ) |  |  |  |   | (4.8  | ) |  |  |  |   | (6.4  | ) |  |  |  |   | (2.6  | ) |
|                             |

|               |                                                             |
|---------------|-------------------------------------------------------------|
| Item7A.  | Quantitative and Qualitative DisclosuresAbout Market Risks. |

In the normal course of operations, weare exposed to market risks arising from adverse changes in interestrates. Market risk is defined for these purposes as the potentialchange in the fair value of financial assets or liabilities resultingfrom an adverse movement in interest rates.

We operated a fleetof approximately 6,000 vehicles as of June  30,  2006 andconsume substantial quantities of fuel for our operations. Based on ourcurrent operations, an increase in fuel costs of ten cents per gallonwould increase our cost of fuel purchased by approximately$1.0 million on an annual basis. From time to time in the past,we have entered into hedging contracts to protect ourselves fromfluctuations in the cost of fuel, and we may seek to do the same in thefuture. We currently do not have any fuel hedging agreements in place,but we continually evaluate entering into such agreements if we believeincreases in fuel costs are likely. No assurance can be given that wewill be able to adequately protect ourselves from fluctuating fuelcosts even if we enter into hedging contracts.

As of June30,  2006, our only material variable rate borrowings are thesenior secured floating rate outstanding notes (LIBOR plus 9.2%interest), $16.5 million of the $20.0 million ofborrowings under our $20.0 million senior credit facility andthe $3.5  million letter of credit advance (prime plus 1%interest). As of June  30,  2006, based upon our variableinterest rate borrowings, a 100 basis point increase in interest rates,applied to our maximum variable rate borrowings, would result in anannual increase in interest expense and a corresponding reduction incash flow of approximately $0.3 million.

CriticalAccounting Policies

In presenting our consolidated financialstatements in conformity with U.S. generally accepted accountingprinciples, we are required to make estimates and judgments that affectthe amounts reported therein. Some of the estimates and assumptions weare required to make relate to matters that are inherently uncertain asthey pertain to future events. We base these estimates on historicalexperience and on various other assumptions that we believe to bereasonable and appropriate. Actual results may differ significantlyfrom these estimates. The following is a description of our accountingpolicies that we believe require subjective and complex judgments, andcould potentially have a material effect on our reported financialcondition or results of operation.

Property, Plant andEquipment.    We depreciate our property, plant and equipmentover their useful lives, which range from 3 to 31.5 years, on astraight-line basis. These useful lives are based upon our estimates ofthe periods that the assets will provide economic benefit. Our policyis to review the carrying value of our long-lived assets wheneverevents or changes in circumstances occur that indicate the carryingvalue may not be recoverable. Our definite-life assets will continue tobe depreciated or amortized over their estimated useful lives and aresubject to the impairment criteria as required by SFASNo. 144.

Transportation ContractRights.    Transportation contract rights primarily representthe value we assigned to the cost of investments in school buscompanies in excess of the book value of the 

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companies acquired. In addition, we havepurchased from unrelated third parties certain transportation contractrights with respect to revenue contracts and travel routes.Transportation contract rights are assessed for impairment at leastannually and whenever events or changes in circumstances indicate thatthe carrying value may not be recoverable. Important factors that couldtrigger an impairment review include significant underperformancerelative to historical or projected future operating results,significant changes in the use of the acquired assets or the strategyof the overall business, and significant negative industry or economictrends. If indicators of impairment are present, management evaluatesthe carrying value of the intangibles in relation to the projection offuture undiscounted cash flows of the underlying assets. Projected cashflows are based on historical results adjusted to reflectmanagement's best estimate of future market and operatingconditions, which may differ from actual cash flow. Transportationcontract rights are amortized on a straight-line basis over twelveyears, which represents the Company's estimate of the averagelength of the contracts and expected renewal periods. We recorded animpairment charge of $5.5 million for the year endedJune 30, 2004 and $1.0 million for the year endedJune 30, 2005, which is included in the school bus operationssegment to adjust the transportation contract rights to fair value. Therequirements for these impairment charges were determined bymanagement's evaluation that the future undiscounted cash flowsattributable to the underlying assets were unlikely to exceed thecarrying value of the transportation contract rights assets for certainof the school bus companies. The impairment charges were the differencebetween book value of the transportation contract rights and estimatedfair value, determined by the estimated future cash flows. See Note 2of Notes to Consolidated Financial Statements included elsewhere inthis Form 10-K for further discussion.

IncomeTaxes.    We follow the liability method under SFASNo. 109, ‘‘Accounting for IncomeTaxes.’’ The primary objectives of accounting for taxesunder SFAS No. 109 are to (1) recognize the amount of taxpayable for the current year and (2) recognize the amount ofdeferred tax liability or asset for the future tax consequencesattributable to temporary differences between the financialstatements' carrying amounts of existing assets and liabilitiesand their respective tax bases and of events that have been reflectedin our financial statements or tax returns. When the realization of adeferred tax asset is not considered to be more likely than not, avaluation allowance is recorded against that deferred tax asset.

As discussed in Note 12 of Notes to Consolidated FinancialStatements, we have net deferred tax assets resulting primarily fromnet operating losses (‘‘NOL’’) that willreduce taxable income in future periods. SFAS No. 109 requiresthat a valuation allowance be established when it is‘‘more likely than not’’ that all or aportion of net deferred tax assets will not be realized. A review ofall available positive and negative evidence needs to be considered,including expected reversals of significant deductible temporarydifferences, a company's recent financial performance, the marketenvironment in which a company operates, tax planning strategies andthe length of the NOL carry-forward period. Management believes thatthe realization of a portion of the deferred tax assets is notconsidered to be more likely than not and, accordingly, has provided avaluation allowance.

We file consolidated federal and stateincome tax returns with our parent, AETG, and its affiliates. Theincome tax charge or benefits allocated to us is based upon anallocation method determined by the group under its tax sharingagreement. The balance identified as deferred tax assets andliabilities can, in substance, be considered the equivalent to amountsdue from and due to this affiliated group based upon the application ofthis method.

Allowance for Doubtful Accounts.    Wemaintain an allowance for estimated losses resulting from the inabilityof our customers to make required payments. We estimate uncollectibleamounts based upon historical bad debts, current customer receivablebalances, age of customer receivable balances, the customer'sfinancial condition and current economic trends. If the actualuncollected amounts were to significantly exceed the estimatedallowance, our results of operations would be materially adverselyaffected.

Revenue Recognition.    Revenues fromschool bus and paratransit and transit operations are recognized whenservices are provided. We bill our customers on a monthly basis basedupon the completion of bus routes and service hours completed to allparatransit customers, which in most 

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cases are based upon contracts or extensionagreements we have with our customers. We have always collected theretained amounts in full.

Insurance Coverage andReserves.    The majority of the Company’s primaryautomobile coverage ($1  million per occurrence) and all of theCompany’s workers’ compensation insurance coverage(except for one subsidiary which has ‘‘FirstDollar’’ coverage) is administered through a third-partyinsurance 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 estimatedclaim losses and fronting charges. The charges are based upon estimatedultimate liability related to these claims and differ from period toperiod due to claim payments, and settlement practices as well aschanges in development factors due to the assumed future cost increasesand discount rates. On a quarterly basis, the Company receives from theinsurance companies estimates of selected ultimate losses that arebased on actuarial analysis. Charges to operations are then adjusted toreflect these calculations.

For the years ended June 30,2004, 2005 and 2006, the Company recorded adjustments related tochanges in prior years claims estimates to its insurance expense asfollows:

|             |  |  |                     |   |            |                     |  |  |  |   |           |   |
|-------------|--|--|---------------------|---|------------|---------------------|--|--|--|---|-----------|---|
| YearEnded   |  |  | WorkersCompensation |   |            | AutomobileLiability |
| June30,2004 |  |  |                     | $ | 772,170    |                     |  |  |  | $ | (463,740  | ) |
| June30,2005 |  |  |                     |   | 1,216,821  |                     |  |  |  |   | 938,411   |   |
| June30,2006 |  |  |                     |   | (1,263,490 | )                   |  |  |  |   | 1,017,515 |   |
|             |

Priorto the year ended June  30,  2004, the Company self insuredits deductibles and recorded reserves for these deductibles based uponestimated ultimate claim losses, including those incurred but notreported. Reserve requirements at June  30,  2006 inrelation to these deductibles were $1.9  million.

RecentAccounting Pronouncements

In June 2005, the FASB issuedSFAS 154, ‘‘Accounting Changes and ErrorCorrections,’’ which replaces APB 20,‘‘Accounting Changes,’’ and SFAS 3,‘‘Reporting Accounting Changes in Interim FinancialStatements.’’ SFAS 154 applies to all voluntary changesin accounting principle, and changes the requirements for accountingfor and reporting of a change in accounting principle. SFAS 154requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it isimpracticable. APB 20 previously required that most voluntary changesin accounting principle be recognized by including in net income of theperiod of the change the cumulative effect of changing to the newaccounting principle. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning afterDecember 15, 2005. Earlier application is permitted foraccounting changes and corrections of errors made in fiscal yearsbeginning after June 1, 2005. We will adopt SFAS 154 onJuly  1,  2006, and we do not expect our adoption of thisnew standard to have a material impact on our financial position,results of operations or cash flows.

In February 2006 theFASB issued SFAS 155, ‘‘Accounting for Certain HybridInstruments,’’ which amends SFAS 133,‘‘Accounting for Derivative Instruments and HedgingActivities,’’ and SFAS 140,‘‘Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.’’ SFAS 155allows financial instruments that have embedded derivatives to beaccounted for as a whole (eliminating the need to bifurcate thederivative from its host) if the holder elects to account for the wholeinstrument on a fair value basis. SFAS 155 also clarifies and amendscertain other provisions of SFAS 133 and SFAS 140. This statement iseffective for all financial instruments acquired or issued in fiscalyears beginning after September 15, 2006. We do not expect ouradoption of this new standard to have a material impact on ourfinancial position, results of operations or cash flows.

InJune 2006, the FASB issued Financial Interpretation No.(FIN) 48, ‘‘Accounting for Uncertainty inIncome Taxes.’’ FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109,‘‘Accounting for Income Taxes.’’ FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition 

35

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and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance onderecognizing, classification, interest and penalties, accounting ininterim periods, disclosure, and transition. The requirements of FIN 48are effective for our fiscal year beginning July 1, 2007. We arein the process of evaluating this guidance and therefore have not yetdetermined the impact that FIN 48 will have on our financial positionor results of operations upon adoption.

|              |                                             |
|--------------|---------------------------------------------|
| Item8.  | Financial Statements and SupplementaryData. |

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

|               |                                                                                 |
|---------------|---------------------------------------------------------------------------------|
| Item 9.  | Changes inDisagreements with Accountants on Accounting and FinancialDisclosure. |

None.

|                |                         |
|----------------|-------------------------|
| Item 9A.  | Controlsand Procedures. |

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

As of the end of the periodcovered by this Form 10-K, the Company again carried out an evaluation,under the supervision and with the participation of theCompany’s management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.Based on the foregoing, the Company’s Chief Executive Officerand Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were still ineffective as of the endof the period covered by this Form 10-K. The Company continues toreview its disclosure controls and procedures in order to improve theireffectiveness. Although the process is ongoing, the Company hasidentified a need to modify its financial period closing from asequential to a more simultaneous process, to reduce the time necessaryto properly complete its financial statement preparation and review. Asthe review process continues, the Company may identify other areas forimprovement. The Company has implemented improvements, but cannot yetdetermine when all improvements will be completed or have the intendedeffect.

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

|               |                    |
|---------------|--------------------|
| Item9B.  | Other Information. |

NotApplicable.

36

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PARTIII

|                |                                                    |
|----------------|----------------------------------------------------|
| Item 10.  | Directors and ExecutiveOfficers of the Registrant. |

The following table sets forthcertain information concerning the members of our board of directorsand our executive officers as of June  30,  2006.

|                 |  |  |     |  |  |                                                 |
|-----------------|--|--|-----|--|--|-------------------------------------------------|
| Name            |  |  | Age |  |  | Position                                        |
| DomenicGatto    |  |  | 57  |  |  | Director,Chief Executive Officer and President  |
| NathanSchlenker |  |  | 68  |  |  | Chief FinancialOfficer                          |
| Jerome Dente    |  |  | 60  |  |  | ChiefOperating Officer, Secretary and Treasurer |
| NoelCabrera     |  |  | 46  |  |  | Executive VicePresident                         |
| Peter Frank     |  |  | 58  |  |  | Chairman ofthe Board                            |
| MatthewKaufman  |  |  | 35  |  |  | Director                                        |
| AdamDraizin     |  |  | 36  |  |  | Director                                        |
|                 |

DomenicGatto, Director, Chief Executive Officer andPresident.    Mr. Gatto has served as Director, ChiefExecutive Officer and President since our formation, and has held suchpositions at AETG since its formation. Mr. Gatto, a Vietnamveteran, began his career in the school bus business as a bus driverand has been responsible for the development of all facets of ourbusiness.

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

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

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

Peter Frank, Chairman ofthe Board.    Mr. Frank was appointed Chairman of theBoard in December 2003 upon the effectiveness of our plan ofreorganization. He served as our Chief Restructuring Officer fromJuly 2002 to December 2003. Prior to his employment withour company, Mr. Frank operated, purchased and sold businessesfor over twenty-five years. Prior to that, he was an investment bankerat Goldman, Sachs & Co. Mr. Frank is a director andChairman of the Board of Worldtex, Inc. and ScovillFasteners, Inc. (both of which are majority owned by GSC) and adirector of Northstar Travel Media LLC and K-R Automation Corp. Hereceived an MBA from Harvard University and a BSEE from the Universityof Michigan.

Matthew Kaufman,Director.    Mr. Kaufman has served as a Director sinceDecember 2003. Mr. Kaufman joined GSCP (NJ), Inc.in 1997, where he is currently a Managing Director. He was previouslyDirector of Corporate Finance with NextWave Telecom, Inc. Priorto that; he was with The Blackstone Group, in the Merchant Banking andMergers & Acquisitions departments. He is Chairman of theBoard of Pacific Aerospace & Electronics, Inc. and adirector of Burke Industries, Inc., Day InternationalGroup, Inc., e-talk Corporation, Safety-Kleen Corp., WaddingtonNorth America, Inc. and Worldtex, Inc. (all of which aremajority owned by GSC, except Safety-Kleen Corp.). Mr. Kaufmanreceived a B.B.A. and MACC from the University of Michigan.

Adam R. Draizin, Director.    Mr. Draizinhas served as a Director since August 2004. Mr. Draizinis a Principal at American Traffic Solutions managing the Fuelspractice, and he is currently engaged in business strategy consultingand systems development work for British Petroleum. Mr. Draizinwas Chief Executive Officer of RAD Energy Corp., a New York based oildistributor with approximately 

37

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$350 million in revenue. InJanuary  2001, Mr. Draizin oversaw RAD's successfulprivate sale to Sprague Energy. Mr. Draizin served on the Boardof the Society of Independent Gasoline Marketers of America and workedas an investment-banking analyst at Kidder, Peabody &Company. Mr. Draizin holds an MBA from the Harvard BusinessSchool and a BA from Washington University.

There are no familyrelationships between any of the aforementioned persons.

Boardof Directors

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

Ourboard of directors consists of the same directors who sit onAETG's board of directors. Pursuant to a stockholders agreementfor AETG, as more fully described under ‘‘Related PartyTransactions — Stockholders Agreement,’’ GSC isentitled to designate a majority of AETG's directors. Ourdirectors serve for indefinite terms until their successors arequalified and elected.

Because we do not have any securitieslisted on a national securities exchange, we are eligible forexemptions from provisions of the Exchange Act requiring independentdirectors, certain independent board committees and written chartersaddressing certain corporate governance matters. We have elected totake advantage of these exemptions and did not establish an independentaudit committee. We believe that the size of our company does notwarrant the need to recruit and retain independent directors solely forthe purpose of establishing an independent audit committee.

Board Committees

We established an audit committee at thefirst meeting of our board of directors following the registrationstatement for the exchange offer on the notes. However, as discussedimmediately above, our audit committee does not consist of independentdirectors.

The audit committee which consists of two of ourcurrent directors (Messrs. Gatto and Frank), reviews and reports to theboard of directors the scope and results of audits by our outsideauditor and our internal auditing staff and reviews with the outsideauditors the adequacy of our system of internal controls. It reviewstransactions between our directors and officers and our Company. Theaudit committee also recommends to the board of directors a firm ofcertified public accountants to serve as our outside auditors for eachfiscal year, review the audit and other professional services renderedby the outside auditor and periodically review the independence of theoutside auditor. While we do not currently have a director who wouldmeet the qualification of an ‘‘audit committee financialexpert’’ as defined in Item 401(k) toRegulation S-K, we believe that each of our current directors isfinancially literate. Because we do not have any securities listed on anational securities exchange, we are eligible for exemptions fromprovisions of the Exchange Act requiring an audit committee financialexpert. We have elected to take advantage of these exemptions. Webelieve that our two current directors, who make up our auditcommittee, collectively possess the knowledge and experience needed tocarry out the duties of the audit committee.

38

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|                |                        |
|----------------|------------------------|
| Item 11.  | ExecutiveCompensation. |

AETG and the Company have entered into anemployment agreement with Domenic Gatto that provides for his continuedemployment with us through December 31, 2008. Mr. Gattowas appointed Chief Executive Officer, President and Vice Chairman ofthe Board under the employment agreement. Under the terms of theemployment agreement, Mr. Gatto receives annual compensation inthe amount of $574,914 base salary, which will be increased onNovember 4, 2006, by the greater of 3% or the last twelvemonths' increase in the consumer price index. In the event of achange of control of AETG or the Company, Mr. Gatto will receivea cash exit bonus equal to the fair market value of 1.5% of AETGor the Company's common shares on a fully diluted basis as of thedate of such change of control. The cash exit bonus is also due andpayable on a reduced basis, as defined in his employment agreement, incertain situations where Mr. Gatto is terminated or resigns. Inthe event a change of control has not occurred prior toDecember 31, 2010, the exit bonus is payable January 1,2011. Mr. Gatto received a performance bonus of $500,000, as aresult of the new agreement with the DOE for school bus transportationservices for the period beginning July 1, 2005. IfMr. Gatto is terminated without cause, as defined in hisemployment agreement he will receive the remainder of his salary forthe outstanding term of his contract and severance in the amount of hissalary from the date of termination through the normal expiration dateof his contract. If Mr. Gatto is terminated with cause, asdefined in his employment agreement he will receive the remainder ofhis salary for the outstanding term of his contract and a percentage ofhis cash exit bonus, plus the lesser of six months salary and hissalary for the outstanding term of his contract. The agreement alsocontains covenants governing confidentiality, non-competition andnon-solicitation upon the termination of his employment. Thenon-compete continues for a period of 18 months(24 months if a majority of the common shares of AETG is thenowned by the current shareholders) following termination ofMr. Gatto's employment by AETG and the Company.

AETG and the Company have entered into an employment agreement withNathan Schlenker, which provides for his continued employment with usthrough December  31,  2007. The agreement coversMr. Schlenker employment as our Chief Financial Officer.Mr. Schlenker receives an annual compensation of $335,834, whichwill be increased on November 1, 2006 and each anniversary datethereafter by the greater of 3% or the last twelve months'increase in the consumer price index. In the event of a change ofcontrol, as defined in his employment agreement of the Company or AETG,Mr.  Schlenker will receive a cash exit bonus equal to the fairmarket value of 0.5% of the Company’s common shares onthe date of such change of control. The cash exit bonus is also due andpayable on a reduced basis, as described in his employment agreement,in certain situations where Mr.  Schlenker is terminated orresigns. In the event a change of control has not occurred prior toDecember  31,  2010, the cash exit bonus is payableJanuary  1,  2011. The employment agreement also containscovenants governing confidentiality, non-competition andnon-solicitation upon termination of Mr.  Schlenker’semployment. The non-compete continues for a period of 18 months (24months if a majority of the common shares of AETG then owned by thecurrent shareholders) following termination of Mr.Schlenker’s employment by Group and the Company.

39

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The following table sets forthcompensation information for our Chief Executive Officer and the fourmost highly compensated named executive officers under‘‘— Directors and ExecutiveOfficers.’’

Summary CompensationTable(1)

|                                                            |  |  |                    |  |      |               |  |   |           |  |         |                             |  |  |                          |     |         |                      |  |  |         |     |         |     |  |  |         |     |         |  |  |  |           |  |           |  |
|------------------------------------------------------------|--|--|--------------------|--|------|---------------|--|---|-----------|--|---------|-----------------------------|--|--|--------------------------|-----|---------|----------------------|--|--|---------|-----|---------|-----|--|--|---------|-----|---------|--|--|--|-----------|--|-----------|--|
|                                                       |  |  | AnnualCompensation |
| Nameand Principal Position                                 |  |  | FiscalYear         |  |      | Salary ($)(1) |  |   | Bonus ($) |  |         | OtherAnnual Compensation($) |  |  | All OtherCompensation($) |     |         | TotalCompensation($) |
| DomenicGattoChief Executive Officer andPresident           |  |  |                    |  | 2006 |               |  |   |           |  | 673,694 |                             |  |  |                          |     | 500,000 |                      |  |  |         |     | 60,800  | (3) |  |  |         |     |    |  |  |  |           |  | 1,234,494 |  |
|                                                            |  |  | 2005               |  |      |               |  |   | 600,146   |  |         |                             |  |  | —                  |     |         |                      |  |  | 60,800  | (3) |         |     |  |  | 50,000  | (4) |         |  |  |  | 710,946   |  |
|                                                            |  |  | 2004               |  |      |               |  | $ | 552,704   |  |         |                             |  |  | 350,000                  | (2) |         |                      |  |  | 60,800  | (3) |         |     |  |  | 125,000 | (4) |         |  |  |  | 1,088,504 |  |
| NathanSchlenkerChief FinancialOfficer(5)                   |  |  |                    |  | 2006 |               |  |   |           |  | 363,825 |                             |  |  |                          |     | 57,500  |                      |  |  |         |     | — |     |  |  |         |     | — |  |  |  |           |  | 421,325   |  |
|                                                            |  |  | 2005               |  |      |               |  |   | 354,903   |  |         |                             |  |  | 15,000                   |     |         |                      |  |  | — |     |         |     |  |  | 150,000 | (6) |         |  |  |  | 519,903   |  |
|                                                            |  |  | 2004               |  |      |               |  |   | 343,263   |  |         |                             |  |  | 260,000                  | (2) |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 603,263   |  |
| JeromeDenteChief Operating Officer, Secretary andTreasurer |  |  |                    |  | 2006 |               |  |   |           |  | 186,106 |                             |  |  |                          |     | 16,060  |                      |  |  |         |     | — |     |  |  |         |     | — |  |  |  |           |  | 202,166   |  |
|                                                            |  |  | 2005               |  |      |               |  |   | 162,572   |  |         |                             |  |  | 28,565                   |     |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 191,137   |  |
|                                                            |  |  | 2004               |  |      |               |  |   | 157,500   |  |         |                             |  |  | 31,936                   |     |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 189,436   |  |
| NoelCabreraExecutive VicePresident                         |  |  |                    |  | 2006 |               |  |   |           |  | 156,818 |                             |  |  |                          |     | 27,000  |                      |  |  |         |     | — |     |  |  |         |     | — |  |  |  |           |  | 183,818   |  |
|                                                            |  |  | 2005               |  |      |               |  |   | 140,800   |  |         |                             |  |  | 31,500                   |     |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 172,300   |  |
|                                                            |  |  | 2004               |  |      |               |  |   | 146,500   |  |         |                             |  |  | 23,500                   |     |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 170,000   |  |
| PeterFrankChairman of theBoard                             |  |  |                    |  | 2006 |               |  |   |           |  | 150,000 |                             |  |  |                          |     | 150,000 |                      |  |  |         |     | — |     |  |  |         |     | — |  |  |  |           |  | 300,000   |  |
|                                                            |  |  | 2005               |  |      |               |  |   | 150,000   |  |         |                             |  |  | 150,000                  |     |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 300,000   |  |
|                                                            |  |  | 2004               |  |      |               |  |   | 395,000   |  |         |                             |  |  | 350,000                  | (2) |         |                      |  |  | — |     |         |     |  |  | — |     |         |  |  |  | 745,000   |  |
| AdamDraizinDirector(7)                                     |  |  |                    |  | 2006 |               |  |   |           |  | — |                             |  |  |                          |     | — |                      |  |  |         |     | — |     |  |  |         |     | 15,000  |  |  |  |           |  | 15,000    |  |
|                                                            |  |  | 2005               |  |      |               |  |   | —   |  |         |                             |  |  | —                  |     |         |                      |  |  | — |     |         |     |  |  | 20,000  |     |         |  |  |  | 20,000    |  |
|                                                            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Thereis no non-cash compensation in lieu of salary or bonus or otherlong-term compensation awards or payouts or any other compensationpayable to the individuals named in the table. There is no applicabledefined benefit plan under which benefits are determined other than401(k) and deferred compensation contributions made. |

|     |                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (2) | These amounts represent primarily the bonuses paidupon our successful exit from Chapter 11 bankruptcy protectionin December  2003. |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (3) | Includes $25,800for automobile allowance and $35,000 for life insuranceallowance. |

|     |                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | This represents a payment of$50,000 and $125,000 in connection with Mr. Gatto providing apersonal guarantee, as required by Wachovia, to support our ReceivableAgreement in fiscal year 2004 and fiscal year 2005,respectively. |

|     |                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Mr. Schlenker servedas our Chief Financial Officer for most of the time from 1990 throughMay 2004. He then served as Director of Finance and inApril  2006 resumed the duties of Chief FinancialOfficer. |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (6) | Mr. Schlenker received$150,000 as non-renewal severance pay in November2004. |

|     |                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------|
| (7) | Mr.  Draizin receives $5,000 ascompensation for every board of director’s meeting heattends. |

|                |                                                                                               |
|----------------|-----------------------------------------------------------------------------------------------|
| Item 12.  | Security Ownership ofCertain Beneficial Owners and Management and Related StockholderMatters. |

As of September  15,  2006, no holder ofwarrants or common shares issued or issuable pursuant to such warrantswas the beneficial owner of more than five percent of our outstandingcommon shares. None of our directors or executive officers own any ofsuch warrants or any of our common shares.

The following tablesets forth information with respect to the beneficial ownership of thecommon shares of AETG as of September  15, 2006, held by:

40

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|              |                                                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------------|
| •  | eachperson whom we know to beneficially own more than five percent of theoutstanding common shares of AETG; |

|              |                        |
|--------------|------------------------|
| •  | each director of AETG; |

|              |                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | AETG's Chief ExecutiveOfficer and the other executive officers listed in the SummaryCompensation Table under Item 11 ‘‘ExecutiveCompensation’’and |

|              |                                                         |
|--------------|---------------------------------------------------------|
| •  | all directors andexecutive officers of AETG as a group. |

Our board of directorsconsists of the same members as AETG's board of directors. Thepersons or entities listed below have sole voting and investment powerwith respect to the shares beneficially owned by them. Except as noted,the address for all persons listed below is: c/o Atlantic ExpressTransportation Group, Inc., 7 North Street, Staten Island, NY10302-1205.

|                                                                                  |  |  |                                        |  |         |                                  |  |  |  |  |         |   |
|----------------------------------------------------------------------------------|--|--|----------------------------------------|--|---------|----------------------------------|--|--|--|--|---------|---|
|                                                                             |  |  | CommonShares of AETG BeneficiallyOwned |
| Nameand Address                                                                  |  |  | Beneficial AmountofOwnership           |  |         | Percentage ofOutstandingClass(1) |
| DomenicGatto                                                                     |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| JeromeDente                                                                      |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| NoelCabrera                                                                      |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| PeterFrank                                                                       |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| MatthewKaufman c/o GSC Partners 12 East 49th Street, Suite 3200New York, NY10017 |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| AdamDraizin                                                                      |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
| GSC(2)c/o GSC Partners 12 East 49th Street, Suite 3200 New York, NY10017         |  |  |                                        |  | 107,593 |                                  |  |  |  |  | 83.9    | % |
| Alldirectors and executive officers of AETG as a group(6 persons)           |  |  |                                        |  | — |                                  |  |  |  |  | — |   |
|                                                                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                       |
|-----|-----------------------------------------------------------------------|
| (1) | Asof September  15,  2006, AETG had 128,240 common sharesoutstanding. |

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

All of the membership interests of GSCP II Holdings (AE), LLC areowned 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 andGSCP (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 IIGP, 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 GSCPartners CDO Fund, Limited.

GSCP (NJ), Inc. is thegeneral partner of GSCP (NJ), L.P. and GSCP (NJ) Holdings, L.P.Alfred C. Eckert III, Keith W. Abell,Richard M. Hayden, Robert A. Hamwee, Thomas V.Inglesby, Matthew C. Kaufman (a member of our board ofdirectors), Christine K. Vanden Beukel and Andrew J.Wagner are the executive officers and stockholders of GSCP(NJ) Inc., limited partners of GSCP (NJ), L.P. and GSCP Holdings(NJ), L.P. and the managing members of Greenwich StreetInvestments II, L.L.C (except for Mr. Wagner).

Byvirtue of each of the above entities' and individuals'relationship with GSCP II Holdings (AE), LLC, GSC Recovery II,L.P. and GSC Partners CDO Fund, Limited, each may be deemed to

41

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have shared voting and investment power over,and be the indirect beneficial owner of the common shares of AETG ownedby GSCP II Holdings (AE), LLC, GSC Recovery II, L.P. andGSC Partners CDO Fund, Limited. Each of the above entities andindividuals disclaims beneficial ownership of AETG's commonshares except to the extent of each entity's andindividual's pecuniary interest in AETG's commonshares.

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

|               |                                                |
|---------------|------------------------------------------------|
| Item13.  | Certain Relationships and RelatedTransactions. |

Receivables Purchase AgreementGuarantee

In June 2004, we entered into the receivableagreement (the ‘‘Receivable Agreement’’)with our senior credit facility lender, Wachovia, to sell to Wachovia,without recourse, certain accounts receivable. In connection with ourentering into the Receivable Agreement, Domenic Gatto has provided apersonal guarantee in support of the agreement in the amount of$5.0 million for the duration of the agreement, for which hereceived a $125,000 guarantee fee.

On November  2,2005 the Company entered into the Amended Receivable Agreement to sellWachovia, without recourse, up to a maximum $8.2  million(previously $5.9  million) of accounts receivable. Domenic Gattoincreased his existing personal guarantee in full support of theAmended Receivable Agreement and received an additional $50,000guarantee fee. As of June  30,  2006, the Company had sold$7.5  million of gross receivables.

Bus ParkingAgreements

Our wholly-owned subsidiary, Staten IslandBus, Inc., leased a parking facility from Atlantic Training,Inc. (a corporation owned in part by Domenic Gatto). We paid an annualbase rent of $48,000 and $35,200 per annum in fiscals 2004 and 2005,respectively. We believe that the rental reflected the reasonablemarket value for the lease. This lease no longerexists.

Stockholders Agreement

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

Transfer Restrictions

The stockholders agreementprohibits transfers of common shares except (1) to investors whojoin the stockholders agreement, (2) in a registered publicoffering, (3) pursuant to ‘‘Tag-AlongRights,’’ which would require shareholders to includeshares of holders of 10% or greater of common shares(as of the effective date of our plan of reorganization), attheir option, in the event of a sale to a third party,(4) pursuant to ‘‘Drag-AlongRights,’’ which would require shareholders to sell all orpart of their common shares in the event of a sale by GSC of a majorityor more of the issued and outstanding common shares, and (5) toa financial institution to secure borrowings in a bona fide pledge.

The stockholders agreement contains ‘‘PreemptiveRights,’’ which allow shareholders the right to purchasecommon shares if AETG makes certain sales of common shares at less thanfair market value (as determined by AETG's board of directors),allowing investors to maintain their respective ownership percentage inAETG.

Corporate Governance

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

42

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Minority ShareholderProtection

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

|              |                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------|
| •  | redeem or repurchase any commonshares unless each holder of common shares may participate on a prorata basis; |

|              |                                                                                                                   |
|--------------|-------------------------------------------------------------------------------------------------------------------|
| •  | pay dividendson its common shares unless the dividend is paid to all holders ofcommon shares on a pro rata basis; |

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

|              |                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------|
| •  | amend or modify AETG'scharter documents in a way that materially limits or conflicts with theterms of the stockholders agreement. |

RegistrationRights

The stockholders agreement also containsregistration rights for the common shares. Shareholders have‘‘Piggyback Registration Rights,’’ whichrequire AETG, if it proposes to register any of its common shares underthe Securities Act in connection with the offering of such shares, toregister all of the shares of shareholders who request registration.GSC has three ‘‘Demand Registrations’’ aslong as GSC is the record holder of at least 20% of AETG'scommon shares. A Demand Registration requires AETG to prepare and filewith the SEC a registration statement on the appropriate form andmaintain the effectiveness for 180 days or until all sharessubject to the Demand Registration have been sold.

Amendment

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

Management Agreements

Uponthe effectiveness of our plan of reorganization, AETG and the Companyentered 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 ofdirectors and management on certain business, operational and financialmatters and provides other advisory services. The agreement providesthat AETG and the Company will pay GSCP, Inc. an annual fee of$500,000, ($400,000 is allocated to the Company) which fee shallaccrue, with interest, at the annual rate of interest applicable to ourindebtedness under our senior credit facility, if the payment of suchfee is not permitted under our senior credit facility. The advisoryservices agreement terminates when GSC ceases to own any common sharesissued upon the effectiveness of the plan of reorganization. As ofJune  30,  2006, $1,032,512 of these fees has been accruedbut not paid.

On February 10, 2004, we entered into amanagement agreement with Atlantic Transit II Corp.(‘‘ATC’’) and Atlantic School Bus Corp.(‘‘ASBC’’), subsidiaries of AETG. Under theagreement, we provide certain administrative services on behalf of ATCand ASBC and their affiliates. The agreement provides that ASBC willpay us a monthly fee of $30 per route vehicle for which we provideadministrative services. The agreement continues until either ATC orthe Company elects to terminate it. Under this agreement, the Companyearned $21,000, $56,340 and $56,520 for the years ended June30,  2004, 2005 and 2006, respectively . The assets of ASBC weresold in July  2006, and this agreement has beenterminated.

43

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Tax Sharing Agreement

AETG and itssubsidiaries, including the Company, entered into a tax sharingagreement, dated December 22, 2000, that provides for aconsolidated filing of federal income tax and allocates federal taxliabilities.

Debtor-In-Possession Financing

InMay 2003, we received an additional $10.0 million in DIPfinancing from GSC and another $2.5 million on August 6,2003. This facility bore interest at 17% per annum and theprincipal was repaid on the effectiveness of our plan ofreorganization, and the commitments there under were terminated. Inconnection with this facility, we remain liable for $1.3 millionin accrued interest as of June  30,  2006.

|               |                                        |
|---------------|----------------------------------------|
| Item14.  | Principal Accounting Fees andServices. |

The following table sets forth the aggregate feesbilled by BDO Seidman for professional services rendered to the Companyfor the audit of the Company's annual financial statements forthe fiscal years ended June  30,  2006 and 2005, for thereviews of the financial statements included in the Company'sQuarterly Reports on Form 10-Q for those fiscal years, and for otherservices rendered on behalf of the Company during those fiscal years.All of such fees were pre-approved by the Company’s board ofdirectors.

|           |  |  |                |   |         |                 |  |  |  |   |         |  |
|-----------|--|--|----------------|---|---------|-----------------|--|--|--|---|---------|--|
|      |  |  | Fiscalyear2005 |   |         | Fiscal year2006 |
| AuditFees |  |  |                | $ | 543,207 |                 |  |  |  | $ | 404,900 |  |
|           |

44

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PartIV

|                |                                         |
|----------------|-----------------------------------------|
| Item 15.  | Exhibits, FinancialStatement Schedules. |

|           |                                                          |
|-----------|----------------------------------------------------------|
| (a)  | 1. Financialstatements filed in item 8 of this Form10-K. |

|           |          |
|-----------|----------|
| (b)  | Exhibits |

|  |   |    |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|---|----|--|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 3 | .1 |  |  |  | RestatedCertificate of Incorporation of the Company (incorporated by referenceto Exhibit 3.1 of the Company's Annual Report onForm 10-K, filed with the SEC on October 15, 1997, FileNo. 333-25507).                                                                                                                                                                                             |
|  | 3 | .2 |  |  |  | Certificate ofAmendment, dated November 19, 2003, to the Certificate ofIncorporation of the Company (incorporated herein by reference toExhibit 3.2 to Atlantic Express Transportation Corp.'sRegistration Statement on Form S-4, FileNo. 333-116749).                                                                                                                                           |
|  | 3 | .3 |  |  |  | Certificate ofAmendment, dated April 20, 2004, to the Certificate ofIncorporation of the Company (incorporated herein by reference toExhibit 3.3 to Atlantic Express Transportation Corp.'sRegistration Statement on Form S-4, FileNo. 333-116749).                                                                                                                                              |
|  | 3 | .4 |  |  |  | Amended andRestated By-Laws of the Company (incorporated herein by reference toExhibit 3.4 to Atlantic Express Transportation Corp.'sRegistration Statement on Form S-4, FileNo. 333-116749).                                                                                                                                                                                                    |
|  | 4 | .1 |  |  |  | Indenture, datedApril 22, 2004, relating to the 12% Senior Secured Notes due2008 and the Senior Secured Floating Rate Notes due 2008, among theCompany, the guarantors party thereto and The Bank of New York, astrustee and collateral agent (incorporated herein by reference toExhibit 4.1 to Atlantic Express Transportation Corp.'sRegistration Statement on Form S-4, FileNo. 333-116749). |
|  | 4 | .2 |  |  |  | RegistrationRights Agreement, dated April 22, 2004, between the Company andJefferies & Company, Inc., as initial purchaser(incorporated herein by reference to Exhibit 4.2 to AtlanticExpress Transportation Corp.'s Registration Statement onForm S-4, FileNo. 333-116749).                                                                                                       |
|  | 4 | .3 |  |  |  | WarrantAgreement, dated April 22, 2004, between the Company and The Bank ofNew York, as warrant agent (incorporated herein by reference toExhibit 4.3 to Atlantic Express Transportation Corp.'sRegistration Statement on Form S-4, FileNo. 333-116749).                                                                                                                                         |
|  | 4 | .4 |  |  |  | EquityRegistration Rights Agreement, dated April 22, 2004, among theCompany, Atlantic Express Transportation Group, Inc., andJefferies & Company, Inc., as initial purchaser(incorporated herein by reference to Exhibit 4.4 to Atlantic ExpressTransportation Corp.'s Registration Statement on Form S-4, FileNo. 333-116749).                                                              |
|  | 4 | .5 |  |  |  | Security Agreement,dated April  22,  2004, among the Company, the guarantorsparty thereto and The Bank of New York, as collateral agent(incorporated herein by reference to Exhibit 4.5 to AtlanticExpress Transportation Corp.'s Registration Statement onForm S-1/A, FileNo. 333-117124).                                                                                                      |
|  | 4 | .6 |  |  |  | SupplementalIndenture, dated March  3,  2005, among the Company, theguarantors party thereto and The Bank of New York, as trustee(incorporated by reference to Exhibit 4.1 of the Company'sCurrent Report on Form 8-K, filed with the SEC on March 7, 2005,File No. 000-24247).                                                                                                                  |
|  | 4 | .7 |  |  |  | Note andWarrant Purchase Agreement, among the Company, the guarantors partythereto, and Airlie Opportunity Capital Management, L.P., datedMarch  3,  2005 (incorporated by reference to Exhibit 4.2of the Company's Current Report on Form 8-K, filed withthe SEC on March 7, 2005, File No.000-24247).                                                                                               |
|  |

45

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|  |    |     |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|----|-----|--|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 4  | .8  |  |  |  | Promissory Note, datedMarch  3,  2005 (incorporated by reference toExhibit 4.3 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                                                                                                                                                                       |
|  | 4  | .9  |  |  |  | Warrant, datedMarch  3,  2005 (incorporated by reference toExhibit 4.4 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                                                                                                                                                                               |
|  | 4  | .10 |  |  |  | EquityRegistration Rights Agreement, dated March  3,  2005, amongthe Company, Atlantic Express Transportation Group, Inc. and AirlieOpportunity Capital Management, L.P. (incorporated by reference toExhibit 4.5 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                                         |
|  | 4  | .11 |  |  |  | Amended andRestated Intercreditor Agreement, dated March  3,  2005,among the Company, the guarantors party thereto, The Bank of New York,as collateral agent, Airlie Opportunity Capital Management, L.P. andWachovia Bank, National Association (incorporated by reference toExhibit 4.6 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, File No.000-24247). |
|  | 4  | .12 |  |  |  | Security Agreement, datedMarch  3,  2005, among the Company, the guarantors partythereto and Airlie Opportunity Capital Management, L.P. (incorporatedby reference to Exhibit 4.7 of the Company's CurrentReport on Form 8-K, filed with the SEC on March 7, 2005,File No. 000-24247).                                                                                               |
|  | 4  | .13 |  |  |  | ThirdSupplemental Indenture, dated March  31,  2006, among theCompany, the guarantors party thereto and The Bank of New York, astrustee (incorporated by reference to Exhibit 4.1 of theCompany's Current Report on Form 8-K, filed with the SECon April  4,  2006, FileNo. 000-24247).                                                                                                   |
|  | 10 | .1  |  |  |  | Second Amendedand Restated Loan and Security Agreement, dated April 22, 2004(incorporated herein by reference to Exhibit 10.1 to AtlanticExpress Transportation Corp.'s Registration Statement on FormS-4, FileNo. 333-116749).                                                                                                                                                           |
|  | 10 | .2  |  |  |  | Fourth Amendedand Restated Employment Agreement, dated November 25, 2003,among, Atlantic Express Transportation Group Inc., the Company andDomenic Gatto (incorporated herein by reference to Exhibit 10.2 toAtlantic Express Transportation Corp.'s Registration Statement onForm S-4, File No.333-116749).                                                                                        |
|  | 10 | .3  |  |  |  | Amendment, dated April 20,2004, to Employment Agreement of Domenic Gatto (incorporated herein byreference to Exhibit 10.3 to Atlantic Express TransportationCorp.'s Registration Statement on Form S-4, FileNo. 333-116749).                                                                                                                                                                   |
|  | 10 | .4  |  |  |  | RetentionAgreement, dated December 24, 2003, between Atlantic ExpressTransportation Group Inc. and Peter Frank (incorporated herein byreference to Exhibit 10.4 to Atlantic Express TransportationCorp.'s Registration Statement on Form S-4, FileNo. 333-116749).                                                                                                                        |
|  | 10 | .5  |  |  |  | EmploymentAgreement, dated September 2, 2003, among Atlantic ExpressTransportation Group Inc., the Company and Neil Abitabilo (incorporatedherein by reference to Exhibit 10.5 to Atlantic ExpressTransportation Corp.'s Registration Statement on Form S-4,File No. 333-116749).                                                                                                         |
|  | 10 | .6  |  |  |  | AdvisoryServices Agreement, dated December 24, 2003, among AtlanticExpress Transportation Group Inc., the Company and GSCP, Inc.(incorporated herein by reference to Exhibit 10.6 to AtlanticExpress Transportation Corp.'s Registration Statement onForm S-4, FileNo. 333-116749).                                                                                             |
|  | 10 | .7  |  |  |  | StockholdersAgreement, dated as of December 24, 2003, between AtlanticExpress Transportation Group  Inc. and its stockholders(incorporated herein by reference to Exhibit 10.7 to AtlanticExpress Transportation Corp.'s Registration Statement onForm S-4, File No. 333-116749).                                                                                               |
|  |

46

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|  |    |      |  |  |  |                                                                                                                                                                                                                                                                                                                             |
|--|----|------|--|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 10 | .8   |  |  |  | The Board of Educationof the City of New York, serial no. 0070, dated July 19, 1979(incorporated by reference to Exhibit 10.12 of the Company'sAnnual Report on Form 10-K, filed with the SEC on October 15,1997, File No. 333-25507).                                                                       |
|  | 10 | .9   |  |  |  | TheBoard of Education of the City of New York, serial no. 8108(incorporated by reference to Exhibit 10.13 of the Company'sAnnual Report on Form 10-K, filed with the SEC onOctober 15, 1997, File No.333-25507).                                                                                             |
|  | 10 | .10* |  |  |  | Extension and ThirteenthAmendment of Contract for Special Education Pupil TransportationServices by and among The Board of Education of the City of New York,Amboy Bus Co., Inc. and Staten Island Bus, Inc.                                                                                                           |
|  | 10 | .11  |  |  |  | The Board of Education of the City of New York,serial no. 9888 by and between The Board of Education of theCity of New York and Amboy Bus Co., Inc. (incorporated byreference to Exhibit 10.15 of the Company's Annual Report onForm 10-K, filed with the SEC on October 15, 1997, FileNo. 333-25507).  |
|  | 10 | .12* |  |  |  | Extension andEleventh Amendment of Contract for Regular Education PupilTransportation Services, by and between The Board of Education of theCity of New York and Amboy Bus Co., Inc. and Atlantic Queens BusCorp.                                                                                                      |
|  | 10 | .13  |  |  |  | New York City Transit AuthorityContract #00D7815B, dated July  2001, by and between New YorkCity Transit Authority and Atlantic Paratrans, Inc.(incorporated herein by reference to Exhibit 10.14 to AtlanticExpress Transportation Corp.'s Registration Statement onForm S-4, FileNo. 333-116749).     |
|  | 10 | .14  |  |  |  | Tax SharingAgreement, dated as of December 22, 2000, between AtlanticExpress Transportation Group Inc. and the Company (incorporated hereinby reference to Exhibit 10.15 to Atlantic Express TransportationCorp.'s Registration Statement on Form S-4, FileNo. 333-116749).                             |
|  | 10 | .15  |  |  |  | SeniorUnsecured Term Note, dated as of August 5, 2004 among AtlanticExpress Transportation Corp. and GSCP II Holdings (AE), L.L.C. and GSCRecovery II, L.P (incorporated herein by reference to Exhibit10.16 to Atlantic Express Transportation Corp.'s RegistrationStatement on Form S-1/A, File No.333-117124). |
|  | 10 | .16  |  |  |  | Amendment No. 3 to SecondAmended and Restated Loan and Security Agreement, dated October 14,2004 (incorporated herein by reference to Exhibit 10.17 toAtlantic Express Transportation Corp.'s Registration Statement onForm S-1/A, FileNo. 333-117124).                                                      |
|  | 10 | .17  |  |  |  | Amendment No.4 to Second Amended and Restated Loan and Security Agreement, datedJanuary  19,  2005 (incorporated by reference toExhibit 10.1 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                            |
|  | 10 | .18  |  |  |  | WaiverAgreement, dated January  19,  2005 (incorporated byreference to Exhibit 10.2 of the Company's Current Reporton Form 8-K, filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                                                                                |
|  | 10 | .19  |  |  |  | LetterAgreement, dated January  13,  2005, among Atlantic ExpressTransportation Group Inc., the Company and Domenic Gatto (incorporatedby reference to Exhibit 10.3 of the Company's CurrentReport on Form 8-K, filed with the SEC on March 7, 2005, FileNo. 000-24247).                                     |
|  | 10 | .20  |  |  |  | LetterAgreement, dated March  2,  2005, among Atlantic ExpressTransportation Group Inc., the Company and Domenic Gatto (incorporatedby reference to Exhibit 10.4 of the Company's CurrentReport on Form 8-K, filed with the SEC on March 7, 2005, FileNo. 000-24247).                                        |
|  |

47

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|  |    |     |  |  |  |                                                                                                                                                                                                                                                                                                                       |
|--|----|-----|--|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 10 | .21 |  |  |  | Amendment No. 5 toSecond Amended and Restated Loan and Security Agreement, datedMarch  3,  2005 (incorporated by reference toExhibit 10.5 of the Company's Current Report on Form 8-K,filed with the SEC on March 7, 2005, FileNo. 000-24247).                                                         |
|  | 10 | .22 |  |  |  | Contract ofSale, dated April  15,  2005, for the real property locatedin Bronx, New York (incorporated by reference to Exhibit 10.1 ofthe Company's Current Report on Form 8-K, filed with theSEC on April 21, 2005, FileNo. 000-24247).                                                               |
|  | 10 | .23 |  |  |  | Lease, for thereal property located in Bronx, New York (incorporated by reference toExhibit 10.2 of the Company's Current Report onForm 8-K, filed with the SEC on April 21, 2005, File No.000-24247).                                                                                                 |
|  | 10 | .24 |  |  |  | Standard Offer, Agreementand Escrow Instructions for Purchase of Real Estate, dated April12,  2005, for the real property located in Los Angeles,California (incorporated by reference to Exhibit 10.3 of theCompany's Current Report on Form 8-K, filed with the SECon April 21, 2005, File No.000-24247). |
|  | 10 | .25 |  |  |  | StandardIndustrial/Commercial Single-Tenant Lease, dated April12,  2005, for the real property located in Los Angeles,California (incorporated by reference to Exhibit 10.4 of theCompany's Current Report on Form 8-K, filed with the SEC onApril 21, 2005, FileNo. 000-24247).                       |
|  | 10 | .26 |  |  |  | InvestmentAgreement, dated October  17,  2005 (incorporated byreference to Exhibit 10.1 of the Company's Current Reporton Form 8-K, filed with the SEC on October  21,2005, File No. 000-24247).                                                                                                            |
|  | 10 | .27 |  |  |  | Contract ofSale, dated November  22,  2005, for the real propertylocated in Staten Island, New York (incorporated by reference toExhibit 10.1 of the Company's Current Report onForm 8-K, filed with the SEC on November  29,  2005,File No. 000-24247).                                               |
|  | 10 | .28 |  |  |  | Lease, forthe real property located in Staten Island, New York (incorporated byreference to Exhibit 10.2 of the Company's Current Report onForm 8-K, filed with the SEC on January  12,  2006,File No. 000-24247).                                                                                               |
|  | 10 | .29 |  |  |  | Letter Agreement,dated April  1,  2006, among Atlantic ExpressTransportation Group Inc., the Company and Domenic Gatto (incorporatedby reference to Exhibit 10.1 of the Company's CurrentReport on Form 8-K, filed with the SEC on April  4,  2006,File No. 000-24247).                                     |
|  | 10 | .30 |  |  |  | FourthAmended and Restated Employment Agreement, dated October25,  2004, among Atlantic Express Transportation Group Inc., theCompany and Nathan Schlenker (incorporated by reference to Exhibit 10.2of the Company's Current Report on Form 8-K, filed withthe SEC on April  4,  2006, File No.000-24247).      |
|  | 10 | .31 |  |  |  | Letter Agreement, datedMarch  1,  2005, among Atlantic Express TransportationGroup Inc., the Company and Nathan Schlenker (incorporated by referenceto Exhibit 10.3 of the Company's Current Report on Form8-K, filed with the SEC on April  4,  2006, FileNo. 000-24247).                                  |
|  | 10 | .32 |  |  |  | LetterAgreement, dated April  1,  2006, among Atlantic ExpressTransportation Group Inc., the Company and Nathan Schlenker(incorporated by reference to Exhibit 10.4 of theCompany's Current Report on Form 8-K, filed with the SEC onApril  4,  2006, FileNo. 000-24247).                                   |
|  | 10 | .33 |  |  |  | Asset PurchaseAgreement, dated May  11,  2006, for the assets of T-NT BusService, Inc. (incorporated by reference to Exhibit 10.1 of theCompany's Current Report on Form 8-K, filed with the SECon May  18,  2006, FileNo. 000-24247).                                                                 |
|  | 21 | .1* |  |  |  | Subsidiaries ofthe Registrant.                                                                                                                                                                                                                                                                                        |
|  |

48

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|  |    |     |  |  |  |                                                                           |
|--|----|-----|--|--|--|---------------------------------------------------------------------------|
|  | 31 | .1* |  |  |  | Certification of ChiefExecutive Office pursuant to Rule13a-14/15d-14(a).  |
|  | 31 | .2* |  |  |  | Certification ofChief Financial Officer pursuant to Rule13a-14/15d-14(a). |
|  | 32 | .1* |  |  |  | Certification ofChief Executive Office pursuant to Section1350            |
|  | 32 | .2* |  |  |  | Certification of Chief FinancialOfficer pursuant to Section1350           |
|  |

|  |
|--|
|  |  |
|  |

|   |               |
|---|---------------|
| * | Filedherewith |

49

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ATLANTICEXPRESS TRANSPORTATION CORP.TABLE OFCONTENTS

|                                                                                                           |  |  |      |  |        |  |
|-----------------------------------------------------------------------------------------------------------|--|--|------|--|--------|--|
|                                                                                                      |  |  | Page |
| Reportof Independent Registered Public AccountingFirm                                                     |  |  |      |  | F-2    |  |
| Consolidated BalanceSheets                                                                                |  |  |      |  | F-3    |  |
| Consolidated Statements ofOperations                                                                      |  |  |      |  | F-4    |  |
| Consolidated Statements ofShareholder's Equity                                                            |  |  |      |  | F-5    |  |
| ConsolidatedStatements of Cash Flows                                                                      |  |  |      |  | F-6    |  |
| Notes toConsolidated FinancialStatements                                                                  |  |  |      |  | F-8    |  |
| Exhibit31.1    Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 |  |  |      |  |   |  |
| Exhibit31.2    Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 |  |  |      |  |   |  |
| Exhibit32.1    Certification Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 |  |  |      |  |   |  |
| Exhibit32.2    Certification Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 |  |  |      |  |   |  |
|                                                                                                           |

F-1

----

Report of Independent Registered PublicAccounting Firm

Board of DirectorsAtlanticExpress Transportation Corp.Staten Island, New York

We haveaudited the accompanying consolidated balance sheets of AtlanticExpress Transportation Corp. and Subsidiaries as of June 30,2005 and 2006 and the related consolidated statements of operations,shareholder's equity, and cash flow for each of the three yearsin the period ended June  30,  2006. These financialstatements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audits includeconsideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in thecircumstances, but not for the purposes of expressing an opinion on theeffectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position ofAtlantic Express Transportation Corp. and Subsidiaries atJune 30, 2005 and 2006, the results of their operations andtheir cash flows for each of the three years in the period endedJune  30,  2006 in conformity with accounting principlesgenerally accepted in the United States ofAmerica.

/s/  BDO SEIDMAN,LLP 

New York, NewYorkSeptember  27,  2006

F-2

----

Atlantic Express Transportation Corp. andSubsidiariesConsolidated BalanceSheets

|                                                                                                                            |  |  |         |   |             |      |  |  |  |   |              |   |
|----------------------------------------------------------------------------------------------------------------------------|--|--|---------|---|-------------|------|--|--|--|---|--------------|---|
|                                                                                                                       |  |  | June30, |
|                                                                                                                       |  |  | 2005    |   |             | 2006 |
| Assets                                                                                                                     |  |  |         |   |        |      |  |  |  |   |         |   |
| Currentassets:                                                                                                             |  |  |         |   |        |      |  |  |  |   |         |   |
| Cash and cashequivalents                                                                                                   |  |  |         | $ | 6,834,961   |      |  |  |  | $ | 501,271      |   |
| Accountsreceivable, net of allowance for doubtful accounts of $1,704,849 and$1,760,310,respectively                        |  |  |         |   | 44,831,587  |      |  |  |  |   | 46,084,799   |   |
| Inventories                                                                                                                |  |  |         |   | 2,636,832   |      |  |  |  |   | 2,763,901    |   |
| Assetsheld for sale −current                                                                                         |  |  |         |   | 222,583     |      |  |  |  |   | 6,222,679    |   |
| Prepaidinsurance                                                                                                           |  |  |         |   | 31,425,704  |      |  |  |  |   | 34,881,384   |   |
| Prepaidexpenses and other currentassets                                                                                    |  |  |         |   | 3,222,345   |      |  |  |  |   | 3,740,504    |   |
| Totalcurrentassets                                                                                                         |  |  |         |   | 89,174,012  |      |  |  |  |   | 94,194,538   |   |
| Property,plant and equipment, at cost, less accumulateddepreciation                                                        |  |  |         |   | 124,521,761 |      |  |  |  |   | 93,477,922   |   |
| Otherassets:                                                                                                               |  |  |         |   |        |      |  |  |  |   |         |   |
| Restricted cash andcashequivalents                                                                                         |  |  |         |   | 5,263,733   |      |  |  |  |   | 3,728,146    |   |
| Restrictedmarketablesecurities                                                                                             |  |  |         |   | 4,560,313   |      |  |  |  |   | 4,428,627    |   |
| Transportationcontract rights,net                                                                                          |  |  |         |   | 2,043,670   |      |  |  |  |   | 3,162,134    |   |
| Deferredfinancing costs,net                                                                                                |  |  |         |   | 9,586,228   |      |  |  |  |   | 6,200,525    |   |
| Depositsand other non-currentassets                                                                                        |  |  |         |   | 4,491,719   |      |  |  |  |   | 8,234,313    |   |
| Assetsheld for sale, net of currentportion                                                                                 |  |  |         |   | 7,364,028   |      |  |  |  |   | —      |   |
| Totalotherassets                                                                                                           |  |  |         |   | 33,309,691  |      |  |  |  |   | 725,753,745  |   |
|                                                                                                                       |  |  |         | $ | 247,005,464 |      |  |  |  | $ | 213,426,205  |   |
| Liabilitiesand Shareholder's Equity(Deficit)                                                                               |  |  |         |   |        |      |  |  |  |   |         |   |
| Current:                                                                                                                   |  |  |         |   |        |      |  |  |  |   |         |   |
| Currentportion of long-termdebt                                                                                            |  |  |         | $ | 24,820,652  |      |  |  |  | $ | 22,196,184   |   |
| Currentportion of capital leaseobligations                                                                                 |  |  |         |   | 1,356,354   |      |  |  |  |   | 1,625,172    |   |
| Insurancefinancingpayable                                                                                                  |  |  |         |   | 3,984,116   |      |  |  |  |   | 4,086,924    |   |
| Controlleddisbursements account − checks issued notfunded                                                            |  |  |         |   | 4,725,722   |      |  |  |  |   | 2,202,664    |   |
| Accountspayable, accrued expenses and other currentliabilities                                                             |  |  |         |   | 24,061,465  |      |  |  |  |   | 26,222,915   |   |
| Accruedcompensation                                                                                                        |  |  |         |   | 6,986,704   |      |  |  |  |   | 3,166,608    |   |
| Currentportion of insurancereserves                                                                                        |  |  |         |   | 2,130,008   |      |  |  |  |   | 1,458,766    |   |
| Accruedinterest                                                                                                            |  |  |         |   | 4,406,189   |      |  |  |  |   | 5,429,594    |   |
| Payableto creditors under the plan of reorganization − currentportion                                                |  |  |         |   | 1,810,085   |      |  |  |  |   | 2,128,413    |   |
| Totalcurrentliabilities                                                                                                    |  |  |         |   | 74,281,295  |      |  |  |  |   | 68,517,240   |   |
| Long-termdebt, net of currentportion                                                                                       |  |  |         |   | 135,316,642 |      |  |  |  |   | 135,885,374  |   |
| Capitallease obligations, net of currentportion                                                                            |  |  |         |   | 4,966,079   |      |  |  |  |   | 3,340,907    |   |
| Insurancereserves, net of currentportion                                                                                   |  |  |         |   | 1,179,807   |      |  |  |  |   | 457,434      |   |
| Deferredincome, net of current portion and other long-termliabilities                                                      |  |  |         |   | 2,415,869   |      |  |  |  |   | 3,328,464    |   |
| Deferredstate and local incometaxes                                                                                        |  |  |         |   | 622,000     |      |  |  |  |   | 622,000      |   |
| Payable tocreditors under the plan of reorganization, net of currentportion                                                |  |  |         |   | 3,247,270   |      |  |  |  |   | 1,307,959    |   |
| Totalliabilities                                                                                                           |  |  |         |   | 222,028,962 |      |  |  |  |   | 213,459,378  |   |
| Commitmentsandcontingencies                                                                                                |  |  |         |   |        |      |  |  |  |   |         |   |
| Shareholder'sequity:                                                                                                       |  |  |         |   |        |      |  |  |  |   |         |   |
| Common stock, parvalue $.01 per share, authorized shares 1,303,200; issued andoutstanding 651,600 and 945,263,respectively |  |  |         |   | 6,516       |      |  |  |  |   | 9,453        |   |
| Additionalpaid-incapital                                                                                                   |  |  |         |   | 110,042,001 |      |  |  |  |   | 114,939,064  |   |
| Accumulateddeficit                                                                                                         |  |  |         |   | (85,155,726 | )    |  |  |  |   | (114,816,797 | ) |
| Accumulatedother comprehensive income(loss)                                                                                |  |  |         |   | 83,711      |      |  |  |  |   | (164,893     | ) |
| Totalshareholder's equity(deficit)                                                                                         |  |  |         |   | 24,976,502  |      |  |  |  |   | (33,173      | ) |
|                                                                                                                       |  |  |         | $ | 247,005,464 |      |  |  |  | $ | 213,426,205  |   |
|                                                                                                                            |

Seeaccompanying Notes.

F-3

----

Atlantic Express Transportation Corp. andSubsidiariesConsolidated Statements ofOperations

|                                                                                         |  |  |                   |   |             |      |  |  |      |   |             |   |  |  |  |   |             |   |
|-----------------------------------------------------------------------------------------|--|--|-------------------|---|-------------|------|--|--|------|---|-------------|---|--|--|--|---|-------------|---|
|                                                                                    |  |  | YearEnded June30, |
|                                                                                    |  |  | 2004              |   |             | 2005 |  |  | 2006 |
| Revenues:                                                                               |  |  |                   |   |        |      |  |  |      |   |        |   |  |  |  |   |        |   |
| Schoolbusoperations                                                                     |  |  |                   | $ | 321,465,664 |      |  |  |      | $ | 319,604,294 |   |  |  |  | $ | 368,065,542 |   |
| Paratransitand transitoperations                                                        |  |  |                   |   | 42,055,023  |      |  |  |      |   | 44,071,271  |   |  |  |  |   | 45,992,526  |   |
| Totalrevenues                                                                           |  |  |                   |   | 363,520,687 |      |  |  |      |   | 363,675,565 |   |  |  |  |   | 414,058,068 |   |
| Costsand expenses:                                                                      |  |  |                   |   |        |      |  |  |      |   |        |   |  |  |  |   |        |   |
| Costof operations − School busoperations                                          |  |  |                   |   | 285,644,957 |      |  |  |      |   | 298,907,448 |   |  |  |  |   | 329,669,220 |   |
| Costof operations − Paratransit and transitoperations                             |  |  |                   |   | 35,033,632  |      |  |  |      |   | 38,490,635  |   |  |  |  |   | 39,474,226  |   |
| Generalandadministrative                                                                |  |  |                   |   | 17,694,969  |      |  |  |      |   | 17,457,368  |   |  |  |  |   | 18,655,416  |   |
| Depreciationandamortization                                                             |  |  |                   |   | 26,286,925  |      |  |  |      |   | 25,028,763  |   |  |  |  |   | 28,199,328  |   |
| Contractrightsimpairment                                                                |  |  |                   |   | 5,462,825   |      |  |  |      |   | 959,468     |   |  |  |  |   | —     |   |
| Totaloperating costs andexpenses                                                        |  |  |                   |   | 370,123,308 |      |  |  |      |   | 380,843,682 |   |  |  |  |   | 415,998,190 |   |
| Lossfromoperations                                                                      |  |  |                   |   | (6,602,621  | )    |  |  |      |   | (17,168,117 | ) |  |  |  |   | (1,940,122  | ) |
| Otherincome(expense):                                                                   |  |  |                   |   |        |      |  |  |      |   |        |   |  |  |  |   |        |   |
| Interestexpense (contractual interest of $32,577,365 at June  30,2004)                  |  |  |                   |   | (25,196,194 | )    |  |  |      |   | (23,513,800 | ) |  |  |  |   | (25,941,210 | ) |
| Reorganizationcosts                                                                     |  |  |                   |   | (11,176,956 | )    |  |  |      |   | (565,485    | ) |  |  |  |   | (568,905    | ) |
| Forgivenessof indebtednessincome                                                        |  |  |                   |   | 101,492,510 |      |  |  |      |   | —     |   |  |  |  |   | —     |   |
| Other                                                                                   |  |  |                   |   | (141,766    | )    |  |  |      |   | (1,096,372  | ) |  |  |  |   | (1,098,434  | ) |
| Income(loss) before benefit from (provision for) income taxes anddiscontinuedoperations |  |  |                   |   | 58,374,973  |      |  |  |      |   | (42,343,774 | ) |  |  |  |   | (29,548,671 | ) |
| Benefitfrom (provision for) incometaxes                                                 |  |  |                   |   | (476,800    | )    |  |  |      |   | 214,000     |   |  |  |  |   | —     |   |
| Income(loss) before discontinuedoperations                                              |  |  |                   |   | 57,898,173  |      |  |  |      |   | (42,129,774 | ) |  |  |  |   | (29,548,671 | ) |
| Lossfrom discontinuedoperations                                                         |  |  |                   |   | (1,080,083  | )    |  |  |      |   | (296,435    | ) |  |  |  |   | (2,400      | ) |
| Netincome(loss)                                                                         |  |  |                   | $ | 56,818,090  |      |  |  |      | $ | (42,426,209 | ) |  |  |  | $ | (29,551,071 | ) |
|                                                                                         |

Seeaccompanying Notes.

F-4

----

Atlantic Express Transportation Corp. andSubsidiariesConsolidated Statements of Shareholder's Equity(Deficit)

|                                        |  |  |                            |   |         |                          |  |  |                    |   |             |                                           |  |  |                           |   |              |       |  |  |  |   |          |   |  |  |  |   |             |   |  |  |  |   |             |   |
|----------------------------------------|--|--|----------------------------|---|---------|--------------------------|--|--|--------------------|---|-------------|-------------------------------------------|--|--|---------------------------|---|--------------|-------|--|--|--|---|----------|---|--|--|--|---|-------------|---|--|--|--|---|-------------|---|
|                                   |  |  | Commonshares,parvalue$0.01 |   |         | Additionalpaid-incapital |  |  | Accumulateddeficit |   |             | Accumulatedothercomprehensiveincome(loss) |  |  | Comprehensiveincome(loss) |   |              | Total |
| Balance, June  30,2003                 |  |  |                            | $ | 6,516   |                          |  |  |                    | $ | 62,442,001  |                                           |  |  |                           | $ | (99,447,607  | )     |  |  |  | $ | 304,827  |   |  |  |  |   |        |   |  |  |  | $ | (36,694,263 | ) |
| Netincome                              |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | 56,818,090   |       |  |  |  |   | —  |   |  |  |  | $ | 56,818,090  |   |  |  |  |   | 56,818,090  |   |
| Contributionof shares fromparent       |  |  |                            |   | — |                          |  |  |                    |   | 44,000,000  |                                           |  |  |                           |   | —      |       |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | 44,000,000  |   |
| Issuanceofwarrants                     |  |  |                            |   | — |                          |  |  |                    |   | 2,700,000   |                                           |  |  |                           |   | —      |       |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | 2,700,000   |   |
| Unrealizedloss on marketablesecurities |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | —      |       |  |  |  |   | (343,335 | ) |  |  |  |   | (343,335    | ) |  |  |  |   | (343,335    | ) |
| Comprehensiveincome                    |  |  |                            |   |    |                          |  |  |                    |   |        |                                           |  |  |                           |   |         |       |  |  |  |   |     |   |  |  |  | $ | 56,474,755  |   |  |  |  |   |        |   |
| Balance,June  30,2004                  |  |  |                            |   | 6,516   |                          |  |  |                    |   | 109,142,001 |                                           |  |  |                           |   | (42,629,517  | )     |  |  |  |   | (38,508  | ) |  |  |  |   |        |   |  |  |  |   | 66,480,492  |   |
| Netloss                                |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | (42,426,209  | )     |  |  |  |   | —  |   |  |  |  | $ | (42,426,209 | ) |  |  |  |   | (42,426,209 | ) |
| Distributionto parentcompany           |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | (100,000     | )     |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | (100,000    | ) |
| Issuanceofwarrants                     |  |  |                            |   | — |                          |  |  |                    |   | 900,000     |                                           |  |  |                           |   | —      |       |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | 900,000     |   |
| Unrealizedgain on marketablesecurities |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | —      |       |  |  |  |   | 122,219  |   |  |  |  |   | 122,219     |   |  |  |  |   | 122,219     |   |
| Comprehensiveloss                      |  |  |                            |   |    |                          |  |  |                    |   |        |                                           |  |  |                           |   |         |       |  |  |  |   |     |   |  |  |  | $ | (42,303,990 | ) |  |  |  |   |        |   |
| Balance,June  30,2005                  |  |  |                            |   | 6,516   |                          |  |  |                    |   | 110,042,001 |                                           |  |  |                           |   | (85,155,726  | )     |  |  |  |   | 83,711   |   |  |  |  |   |        |   |  |  |  |   | 24,976,502  |   |
| Netloss                                |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | (29,551,071  | )     |  |  |  |   | —  |   |  |  |  | $ | (29,551,071 | ) |  |  |  |   | (29,551,071 | ) |
| Distributionto parentcompany           |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | (110,000     | )     |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | (110,000    | ) |
| Issuanceof commonstock                 |  |  |                            |   | 2,937   |                          |  |  |                    |   | 4,897,063   |                                           |  |  |                           |   | —      |       |  |  |  |   | —  |   |  |  |  |   | —     |   |  |  |  |   | 4,900,000   |   |
| Unrealizedloss on marketablesecurities |  |  |                            |   | — |                          |  |  |                    |   | —     |                                           |  |  |                           |   | —      |       |  |  |  |   | (248,604 | ) |  |  |  |   | (248,604    | ) |  |  |  |   | (248,604    | ) |
| Comprehensiveloss                      |  |  |                            |   |    |                          |  |  |                    |   |        |                                           |  |  |                           |   |         |       |  |  |  |   |     |   |  |  |  | $ | (29,799,675 | ) |  |  |  |   |        |   |
| Balance,June  30,2006                  |  |  |                            | $ | 9,453   |                          |  |  |                    | $ | 114,939,064 |                                           |  |  |                           | $ | (114,816,797 | )     |  |  |  | $ | (164,893 | ) |  |  |  |   |        |   |  |  |  | $ | (33,173     | ) |
|                                        |

Seeaccompanying Notes.

F-5

----

Atlantic Express Transportation Corp. andSubsidiariesConsolidated Statements of CashFlows

|                                                                                                 |  |  |                        |   |              |      |  |  |      |   |             |   |  |  |  |  |              |   |
|-------------------------------------------------------------------------------------------------|--|--|------------------------|---|--------------|------|--|--|------|---|-------------|---|--|--|--|--|--------------|---|
|                                                                                            |  |  | YearEndedJune 30, |
|                                                                                            |  |  | 2004                   |   |              | 2005 |  |  | 2006 |
| Cashflows from operatingactivities:                                                             |  |  |                        |   |         |      |  |  |      |   |        |   |  |  |  |  |         |   |
| Netincome(loss)                                                                                 |  |  |                        | $ | 56,818,090   |      |  |  |      | $ | (42,426,209 | ) |  |  |  |  | ($29,551,071 | ) |
| Adjustmentsto reconcile net income (loss) to net cash provided by (used in)operatingactivities: |  |  |                        |   |         |      |  |  |      |   |        |   |  |  |  |  |         |   |
| Forgivenessof indebtednessincome                                                                |  |  |                        |   | (102,901,289 | )    |  |  |      |   | —     |   |  |  |  |  | —      |   |
| Loss(gain) on sales of marketable securities and investments,net                                |  |  |                        |   | (167,483     | )    |  |  |      |   | (13,725     | ) |  |  |  |  | 30,645       |   |
| Depreciation                                                                                    |  |  |                        |   | 23,564,883   |      |  |  |      |   | 23,901,413  |   |  |  |  |  | 21,492,851   |   |
| Fixedassetimpairment                                                                            |  |  |                        |   | 931,552      |      |  |  |      |   | —     |   |  |  |  |  | 5,738,676    |   |
| Amortization                                                                                    |  |  |                        |   | 11,114,659   |      |  |  |      |   | 4,163,714   |   |  |  |  |  | 4,665,976    |   |
| Contractrightsimpairment                                                                        |  |  |                        |   | 5,462,825    |      |  |  |      |   | 959,468     |   |  |  |  |  | —      |   |
| Amortizationof original issuediscount                                                           |  |  |                        |   | 126,087      |      |  |  |      |   | 776,892     |   |  |  |  |  | 974,149      |   |
| Reservefor doubtful accountsreceivable                                                          |  |  |                        |   | 241,194      |      |  |  |      |   | 733,311     |   |  |  |  |  | 120,000      |   |
| Writeoff of accountsreceivable                                                                  |  |  |                        |   | (89,774      | )    |  |  |      |   | (363,490    | ) |  |  |  |  | (64,539      | ) |
| Losson sales of fixed assets,net                                                                |  |  |                        |   | 34,492       |      |  |  |      |   | 1,035,770   |   |  |  |  |  | 1,099,267    |   |
| Deferredstate and local incometaxes                                                             |  |  |                        |   | 372,000      |      |  |  |      |   | (300,000    | ) |  |  |  |  | —      |   |
| Decrease(increase)in:                                                                           |  |  |                        |   |         |      |  |  |      |   |        |   |  |  |  |  |         |   |
| Restrictedcash and cashequivalents                                                              |  |  |                        |   | (1,036,614   | )    |  |  |      |   | 1,110,516   |   |  |  |  |  | —      |   |
| Accountsreceivable                                                                              |  |  |                        |   | 8,096,259    |      |  |  |      |   | 1,769,610   |   |  |  |  |  | (1,308,673   | ) |
| Inventories                                                                                     |  |  |                        |   | 4,783,291    |      |  |  |      |   | (59,679     | ) |  |  |  |  | (140,698     | ) |
| Prepaidexpenses and other currentassets                                                         |  |  |                        |   | 2,271,241    |      |  |  |      |   | (7,356,037  | ) |  |  |  |  | (4,036,943   | ) |
| Depositsand other non-currentassets                                                             |  |  |                        |   | (261,446     | )    |  |  |      |   | 230,141     |   |  |  |  |  | (3,749,277   | ) |
| Increase(decrease)in:                                                                           |  |  |                        |   |         |      |  |  |      |   |        |   |  |  |  |  |         |   |
| Accountspayable, accrued expenses, other current liabilities and accruedcompensation            |  |  |                        |   | 11,923,498   |      |  |  |      |   | 3,188,332   |   |  |  |  |  | (589,305     | ) |
| Controlleddisbursementaccount                                                                   |  |  |                        |   | (2,254,313   | )    |  |  |      |   | 2,140,563   |   |  |  |  |  | (2,523,058   | ) |
| Insurancefinancingpayable                                                                       |  |  |                        |   | 1,253,077    |      |  |  |      |   | 174,612     |   |  |  |  |  | 102,809      |   |
| Payableto creditors under the plan ofreorganization                                             |  |  |                        |   | (856,250     | )    |  |  |      |   | (1,694,061  | ) |  |  |  |  | (1,620,983   | ) |
| Insurancereserve and other long-termliabilities                                                 |  |  |                        |   | (4,051,467   | )    |  |  |      |   | (1,142,494  | ) |  |  |  |  | (1,079,113   | ) |
| Netcash provided by (used in) operatingactivities                                               |  |  |                        |   | 15,374,512   |      |  |  |      |   | (13,171,353 | ) |  |  |  |  | (10,439,287  | ) |
| Cashflows from investing activities:                                                            |  |  |                        |   |         |      |  |  |      |   |        |   |  |  |  |  |         |   |
| Additions toproperty, plant andequipment                                                        |  |  |                        |   | (11,194,364  | )    |  |  |      |   | (5,826,822  | ) |  |  |  |  | (6,056,643   | ) |
| Purchaseof transportation contractrights                                                        |  |  |                        |   | (79,154      | )    |  |  |      |   | (377,598    | ) |  |  |  |  | (1,764,272   | ) |
| Duefromparent                                                                                   |  |  |                        |   | (461,688     | )    |  |  |      |   | —     |   |  |  |  |  | —      |   |
| Proceedsfrom sales of fixedassets                                                               |  |  |                        |   | 147,358      |      |  |  |      |   | 4,853,602   |   |  |  |  |  | 11,028,370   |   |
| Decreasein restricted cash and cashequivalents                                                  |  |  |                        |   | (522,322     | )    |  |  |      |   | (352,923    | ) |  |  |  |  | 1,535,587    |   |
| Purchasesof marketablesecurities                                                                |  |  |                        |   | (1,153,898   | )    |  |  |      |   | (8,183,338  | ) |  |  |  |  | (3,913,256   | ) |
| Proceedsfrom sales or redemptions of marketablesecurities                                       |  |  |                        |   | 2,387,766    |      |  |  |      |   | 8,304,267   |   |  |  |  |  | 3,760,484    |   |
| Netcash provided by (used) in investingactivities                                               |  |  |                        |   | (10,876,302  | )    |  |  |      |   | (1,582,812  | ) |  |  |  |  | 4,590,270    |   |
|                                                                                                 |

F-6

----

Atlantic Express Transportation Corp. andSubsidiariesConsolidated Statements of Cash Flows(continued)

|                                                                      |  |  |                        |   |              |      |  |  |      |   |            |   |  |  |  |   |            |   |
|----------------------------------------------------------------------|--|--|------------------------|---|--------------|------|--|--|------|---|------------|---|--|--|--|---|------------|---|
|                                                                 |  |  | YearEndedJune 30, |
|                                                                 |  |  | 2004                   |   |              | 2005 |  |  | 2006 |
| Cashflows from financing activities:                                 |  |  |                        |   |         |      |  |  |      |   |       |   |  |  |  |   |       |   |
| Payment of GSCP DIPloan                                              |  |  |                        | $ | (10,000,000  | )    |  |  |      | $ | —    |   |  |  |  | $ | —    |   |
| Proceedsfrom senior securednotes                                     |  |  |                        |   | 115,000,000  |      |  |  |      |   | —    |   |  |  |  |   | —    |   |
| Proceedsfrom sale of commonstock                                     |  |  |                        |   | —      |      |  |  |      |   | —    |   |  |  |  |   | 4,900,000  |   |
| Proceedsfrom (payments to) new senior creditfacility                 |  |  |                        |   | 14,269,937   |      |  |  |      |   | 5,138,816  |   |  |  |  |   | (1,653,051 | ) |
| Revolvingline ofcredit                                               |  |  |                        |   | (103,466,184 | )    |  |  |      |   | —    |   |  |  |  |   | —    |   |
| Proceedsfrom senior unsecurednotes                                   |  |  |                        |   | —      |      |  |  |      |   | 4,900,000  |   |  |  |  |   | —    |   |
| Proceedsfrom third priority senior securednotes                      |  |  |                        |   | —      |      |  |  |      |   | 14,925,000 |   |  |  |  |   | —    |   |
| Distributionto parentcompany                                         |  |  |                        |   | —      |      |  |  |      |   | (100,000   | ) |  |  |  |   | (110,000   | ) |
| Principalpayments on borrowings and capital leaseobligations         |  |  |                        |   | (4,727,379   | )    |  |  |      |   | (3,428,499 | ) |  |  |  |   | (3,314,360 | ) |
| Deferredfinancingcosts                                               |  |  |                        |   | (14,933,989  | )    |  |  |      |   | (3,587,874 | ) |  |  |  |   | (307,262   | ) |
| Netcash provided by (used in) financingactivities                    |  |  |                        |   | (3,857,615   | )    |  |  |      |   | 17,847,443 |   |  |  |  |   | (484,673   | ) |
| Netincrease (decrease) in cash and cashequivalents                   |  |  |                        |   | 640,595      |      |  |  |      |   | 3,093,278  |   |  |  |  |   | (6,333,690 | ) |
| Cashand cash equivalents, beginning ofyear                           |  |  |                        |   | 3,101,088    |      |  |  |      |   | 3,741,683  |   |  |  |  |   | 6,834,961  |   |
| Cashand cash equivalents, end ofperiod                               |  |  |                        | $ | 3,741,683    |      |  |  |      | $ | 6,834,961  |   |  |  |  | $ | 501,271    |   |
| Supplementaldisclosures on cash flow information:                    |  |  |                        |   |         |      |  |  |      |   |       |   |  |  |  |   |       |   |
| Cash paidduring the periodfor:                                       |  |  |                        |   |         |      |  |  |      |   |       |   |  |  |  |   |       |   |
| Interest                                                             |  |  |                        | $ | 13,188,615   |      |  |  |      | $ | 18,391,418 |   |  |  |  | $ | 20,468,888 |   |
| Incometaxes                                                          |  |  |                        | $ | 247,287      |      |  |  |      | $ | 139,665    |   |  |  |  | $ | 236,467    |   |
| Supplementaldisclosure of non-cash financing activities:             |  |  |                        |   |         |      |  |  |      |   |       |   |  |  |  |   |       |   |
| Contribution ofshares fromparent                                     |  |  |                        | $ | 44,000,000   |      |  |  |      | $ | —    |   |  |  |  | $ | —    |   |
| Originalissue discount associated with the issuance ofwarrants       |  |  |                        | $ | 2,700,000    |      |  |  |      | $ | 900,000    |   |  |  |  | $ | —    |   |
| Capitallease obligations incurred for purchases ofvehicles           |  |  |                        | $ | 7,529,216    |      |  |  |      | $ | 1,115,874  |   |  |  |  | $ | —    |   |
| Loansincurred for purchases ofvehicles                               |  |  |                        | $ | 511,596      |      |  |  |      | $ | 1,266,878  |   |  |  |  | $ | 461,510    |   |
| Deferredfinancing costs paid from third priority senior securednotes |  |  |                        | $ | —      |      |  |  |      | $ | 75,000     |   |  |  |  | $ | —    |   |
| Letterof credit advance for insurance lossfund                       |  |  |                        | $ | —      |      |  |  |      | $ | 3,500,000  |   |  |  |  | $ | —    |   |
|                                                                      |

Seeaccompanying Notes.

F-7

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AtlanticExpress Transportation Corp. and SubsidiariesNotes to ConsolidatedFinancial Statements

1.    Business

Atlantic ExpressTransportation Corp. (‘‘AETC’’ or the‘‘Company’’), a wholly owned subsidiary ofAtlantic Express Transportation Group Inc.(‘‘AETG’’), is one of the largest providersof school bus transportation in the United States, providing servicescurrently to various municipalities in New York, Missouri,Massachusetts, California, Pennsylvania, New Jersey andIllinois. In addition to its school bus transportation operations, AETCalso provides services to public transit systems for physically ormentally challenged passengers, fixed route transit, express commuterline charter and tour services, and through May  2004 sold schoolbuses and commercial vehicles in New Jersey and various counties in NewYork (Note 2). Since 1998, GSC NJ through its affiliatesGreenwich Street Capital (‘‘GSC’’) has beenthe majority holder of AETG.

2.    Summary of SignificantAccounting Policies

Basis of Presentation

For the yearsended June 30, 2005 and 2006, the Company incurred net losses of$42,426,209 and $29,551,071, respectively. For the year endedJune 30, 2004 the Company had net income of $56,818,090. The netincome for the year ended June 30, 2004 includes forgiveness ofindebtedness income of $101,492,510 from continuing operations and$1,408,779 from discontinued operations related to the plan ofreorganization (the ‘‘POR’’) becomingeffective. On August 16, 2002, the Company filed a voluntarypetition for reorganization under Chapter 11 of the United StatesBankruptcy Code (Note 3). The Company operated under adebtor-in-possession financing facility, for the period fromAugust 16, 2002 until December 24, 2003, when it obtainedexit financing as the POR became effective.

The consolidatedfinancial statements include the accounts of AETC and its subsidiaries.All significant intercompany transactions and balances have beeneliminated.

Discontinued Operations

During the fiscalyear ended June 30, 2003, the Company decided to sell certainassets of Central New York Coach Sales &Service, Inc. (‘‘CNY’’) and JerseyBus Sales, Inc. (‘‘JBS’’), theCompany's bus sales subsidiaries. The assets of CNY were soldAugust 18, 2003. The Company sustained a net loss on the sale ofthese assets of approximately $59,000. Following that sale, theCompany's bus sales operations were conducted by JBS. The Companyceased the JBS operations in May 2004. These operations had beenreported in the Company's bus sales operation segment and havebeen accounted for as discontinued operations in accordance withStatement of Financial Accounting Standards(‘‘SFAS’’) No. 144. For the yearended June 30, 2004, the Company recorded an additional aftertax charge of $1,298,104 to adjust the value of assets to be sold tonet realizable value. Interest expense of $912,421, $17,568 and $0 wasallocated to discontinued operations for the years endedJune 30, 2004, 2005 and 2006, respectively. The Companyallocated interest expense and deferred financing costs, attributableto its senior secured debt, revolving line of credit and new seniorcredit facility (Note 10), on the basis of the monthly netintercompany liability balances, which reflect and represent the debtthat would be required by the discontinued operations. These chargesare included in the net loss from discontinued operations for the yearsended June 30, 2004 , 2005 and 2006. Loss from discontinuedoperations for the year ended June 30, 2004 included$1,408,779 of forgiveness of indebtedness income.

F-8

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Summary results of the bus salesoperations, which have been classified separately as discontinuedoperations, were asfollows:

|                                    |  |  |                         |   |            |      |  |  |      |   |          |   |  |  |  |   |         |   |
|------------------------------------|--|--|-------------------------|---|------------|------|--|--|------|---|----------|---|--|--|--|---|---------|---|
|                               |  |  | Yearended June 30, |
|                               |  |  | 2004                    |   |            | 2005 |  |  | 2006 |
| Revenue– Bus salesoperations |  |  |                         | $ | 29,495,138 |      |  |  |      | $ | —  |   |  |  |  | $ | — |   |
| Lossbefore incometax               |  |  |                         |   | (1,074,083 | )    |  |  |      |   | (294,435 | ) |  |  |  |   | (2,399  | ) |
| Provisionfor incometaxes           |  |  |                         |   | 6,000      |      |  |  |      |   | 2,000    |   |  |  |  |   | — |   |
| Lossfrom discontinuedoperations    |  |  |                         | $ | (1,080,083 | )    |  |  |      | $ | (296,435 | ) |  |  |  | $ | (2,399  | ) |
|                                    |

Theremaining balance of assets of discontinued operations atJune 30, 2004 was sold in September 2004 for approximatenet book value.

Use of Estimates

The preparation offinancial statements and related disclosures in conformity withaccounting principles generally accepted in the United States requiresmanagement to make judgments, estimates and assumptions that affect thereported amounts of assets and liabilities, disclosures of contingentassets and liabilities at the date of the financial statements and thereported amount of revenues and expenses and the accompanying notes.Actual results could differ from those estimates.

The Companybases its estimates and judgments on historical experience and onvarious other assumptions that it believes are reasonable under thecircumstances. Amounts reported based upon these assumptions, includebut are not limited to insurance reserves, allowance for doubtfulaccounts, income taxes, claims by creditors, forgiveness ofindebtedness income and other long-lived assets.

RevenueRecognition

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

Cash Equivalents

Cash equivalents consist ofshort-term, highly liquid investments with maturities of 90 daysor less when purchased, which are readily convertible intocash.

Marketable Securities

In accordance with FinancialAccounting Standards Board Statement No. 115, AETC determinesthe classification of securities as held-to-maturity oravailable-for-sale at the time of purchase, and reevaluates suchdesignation as of each balance sheet date. Securities are classified asheld-to-maturity when AETC has the positive intent and ability to holdthe securities to maturity. Held-to-maturity securities are stated atcost, adjusted for amortization of premiums and discounts to maturity.Marketable securities not classified as held-to-maturity are classifiedas available-for-sale. Available-for-sale securities are carried atfair value, with unrealized gains and losses, reported as a separatecomponent of shareholder's equity. The cost of securities sold isbased on the specific identificationmethod.

Inventories

Inventories primarily consist offuel, parts and supplies, which are valued at the lower of cost ormarket value. Cost is determined using the first-in, first-outmethod.

F-9

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Assets Held for Sale

Assetsassociated with T-NT Bus Service, Inc.(‘‘T-NT’’) have been reclassified to assetsheld for sale (see note20).

|                                                                     |  |  |         |   |           |      |  |  |  |   |           |  |
|---------------------------------------------------------------------|--|--|---------|---|-----------|------|--|--|--|---|-----------|--|
|                                                                |  |  | June30, |
|                                                                |  |  | 2005    |   |           | 2006 |
| Inventories                                                         |  |  |         | $ | 222,583   |      |  |  |  | $ | 236,212   |  |
| Property,plant and equipment, at cost, less accumulateddepreciation |  |  |         |   | 5,416,650 |      |  |  |  |   | 4,354,400 |  |
| Transportationcontract rights,net                                   |  |  |         |   | 1,944,378 |      |  |  |  |   | 1,629,067 |  |
| Deposits andother non-currentassets                                 |  |  |         |   | 3,000     |      |  |  |  |   | 3,000     |  |
|                                                                |  |  |         | $ | 7,586,611 |      |  |  |  | $ | 6,222,679 |  |
|                                                                     |

Property,Plant and Equipment

Property, plant and equipment are stated atcost and depreciated utilizing the straight-line method over the livesof the related assets. The useful lives of property, plant andequipment for purposes of computing depreciation are asfollows:

|                          |  |  |          |
|--------------------------|--|--|----------|
|                     |  |  | Years    |
| Buildingandimprovements  |  |  | 15- 31.5 |
| Transportation equipment |  |  | 5 -15    |
| Other                    |  |  | 3 -7     |
|                          |

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

Long-LivedAssets

Long-lived assets, such as intangible assets andproperty, plant and equipment, are evaluated for impairment when eventsor changes in circumstances indicate that the carrying amounts of theassets may not be recoverable through the estimated undiscounted futurecash flows from the use of these assets. When any such impairmentexists, the related assets will be written down to their fair value.Based upon proceeds from auction sales of vehicles and offers topurchase or sale of assets of certain of the Company’soperations the Company recorded impairment charges of $931,552, 0 and$5,738,676 for the years ended June  30,  2004, 2005 and2006, respectively. These charges are included in depreciation andamortization on the Consolidated Statements of Operations andConsolidated Statements of Cash Flows.

Transportation ContractRights

Transportation contract rights primarily represent thevalue the Company assigned to the cost of investments in certain of ourschool bus subsidiaries in excess of the book value of the companiesacquired. In addition, AETC has purchased from unrelated third partiescertain transportation contract rights with respect to revenuecontracts and travel routes. Using earnings before interest, incometaxes, depreciation and amortization(‘‘EBITDA’’) as a measurement tool, theCompany reviews the financial performance of its subsidiary buscompanies that have transportation contract rights, annually. If thisreview indicates that the transportation contract rights are likely tobe impaired in value, the Company projects the future undiscounted cashflows attributable to such subsidiary bus company and compares it tothe carrying value of the transportation contract rights assets. Themajor impacts to the future undiscounted cash flows are either areduction of service requirements (e.g., routes) that decrease revenue,an increase in costs and expenses at a rate greater than thecorresponding contractual revenue increase, or a combination of bothfactors. If this comparison indicates that the future undiscounted cashflows attributable to the underlying assets are unlikely to exceed thecarrying value of the transportation contract rights, an impairmentcharge is taken based on the difference between the estimated futurecash flows, determined to be the estimated fair value, 

F-10

----

and the carrying value of the transportationcontract rights. Using this methodology, it was determined thatimpairment charges of $5,462,825, $959,468 and $0 for the fiscal yearsended June 30, 2004, 2005 and 2006 respectively, were necessaryto adjust the transportation contract rights to fair value. Themajority of the impairment charges in both fiscal years endedJune 30, 2004 and 2005 were in subsidiary bus companies inMassachusetts.

Transportation contract rights are amortized on astraight-line basis over a twelve-year period, which represents theCompany's estimate of the average length of the contracts andexpected renewal periods. Transportation contract rights associatedwith T-NT have been reclassified to assets held for sale (seeabove).

Transportation contract rights are comprised of thefollowing:

|                                   |  |  |         |   |            |      |  |  |  |   |            |  |
|-----------------------------------|--|--|---------|---|------------|------|--|--|--|---|------------|--|
|                              |  |  | June30, |
|                              |  |  | 2005    |   |            | 2006 |
| Grosscarryingamount               |  |  |         | $ | 15,914,772 |      |  |  |  | $ | 17,679,044 |  |
| Lessaccumulatedamortization       |  |  |         |   | 13,871,102 |      |  |  |  |   | 14,516,910 |  |
| Transportationcontract rights,net |  |  |         | $ | 2,043,670  |      |  |  |  | $ | 3,162,134  |  |
|                                   |

Amortizationexpense recorded for the years ended June  30,  2004, 2005and 2006 was $1,890,081, $1,041,519, and $961,119,respectively.

Estimated amortization expense for theyears ending June 30,

|      |  |  |  |   |         |  |
|------|--|--|--|---|---------|--|
| 2007 |  |  |  | $ | 513,837 |  |
| 2008 |  |  |  |   | 513,837 |  |
| 2009 |  |  |  |   | 513,837 |  |
| 2010 |  |  |  |   | 397,054 |  |
| 2011 |  |  |  |   | 250,837 |  |
|      |

DeferredFinancing Costs

Deferred financing costs are amortized on astraight-line basis, which approximates the effective interest ratemethod, over the term of the financing to which the costs relate, whichrange from three to four years because outstanding balances of debtremain substantially unchanged. These changes are included in interestexpense on the Consolidated Statements of Operations.

InsuranceCoverage and Reserves

The majority of the Company’sprimary automobile coverage ($1  million per occurrence) and allof the Company’s workers compensation insurance coverage (exceptfor one subsidiary which has ‘‘FirstDollar’’ coverage) is administered through a third partyinsurance 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 estimatedclaim losses and fronting charges. The charges are based upon estimatedultimate liability related to these claims and differ from period toperiod due to claim payments, and settlement practices as well aschanges in development factors due to the assumed future cost increasesand discount rates. On a quarterly basis, the Company receives from theinsurance companies estimates of selected ultimate losses that arebased on actuarial analysis. Charges to operations are then adjusted toreflect these calculations.

F-11

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For the years ended June 30, 2004,2005 and 2006 the Company recorded adjustments related to changes inprior years claims estimates to its insurance expense as follows:

|               |  |  |                     |   |            |                     |  |  |  |   |           |   |
|---------------|--|--|---------------------|---|------------|---------------------|--|--|--|---|-----------|---|
| YearEnded     |  |  | WorkersCompensation |   |            | AutomobileLiability |
| June  30,2004 |  |  |                     | $ | 772,170    |                     |  |  |  | $ | (463,740  | ) |
| June30,2005   |  |  |                     |   | 1,216,821  |                     |  |  |  |   | 938,411   |   |
| June30,2006   |  |  |                     |   | (1,263,490 | )                   |  |  |  |   | 1,017,515 |   |
|               |

Priorto the year ended June  30,  2004, the Company self insuredits deductibles and recorded reserves for these deductibles based uponestimated ultimate claim losses, including those incurred but notreported. Reserve requirements at June  30,  2006 inrelation to these deductibles were $1.9  million.

InFebruary 2003, the DOE entered into the MOU with our company andother school bus transportation providers, and on January 5,2005 amended the existing contracts whereby the DOE reduced operatingcosts for its service providers, including assuming certain vehicleinsurance obligations. In addition, the Company is not responsible forthe administration or payment of insurance claims arising afterApril 1, 2003. The Company is not aware of any factors thatmight impair the DOE's ability or intent to pay claims under thisprogram. The accompanying financial statements do not reflect reservesfor such claims arising after April  1,2003.

Income Taxes

AETC follows the liability methodunder Statement of Financial Accounting Standards(‘‘SFAS’’) No. 109,‘‘Accounting for Income Taxes.’’ Theprimary objectives of accounting for taxes under SFAS No. 109are to (a) recognize the amount of tax payable for the currentyear and (b) recognize the amount of deferred tax liability orasset for the future tax consequences attributable to temporarydifferences between the financial statements' carrying amounts ofexisting assets and liabilities and their respective tax bases and ofevents that have been reflected in AETC's financial statements ortax returns. When the realization of a deferred tax asset is notconsidered to be more likely than not, a valuation allowance isrecorded against that deferred tax asset.

AETC files consolidatedfederal, state and local income tax returns with its parent andaffiliates. The income tax charge or benefits allocated to AETC isbased upon an allocation method determined by the group under a taxsharing agreement. The balance identified as deferred tax assets andliabilities can, in substance, be considered the equivalent to amountsdue from and due to this affiliated group based upon the application ofthis method.

Fair Value of Financial Instruments

Thecarrying value of financial instruments including cash and cashequivalents, accounts receivable including retainage, accounts payable,and short term debt approximated their fair value as of June 30,2005 and 2006, due to either their short maturity or terms similar tothose available to similar companies in the open market. Marketablesecurities, classified as available-for-sale, are valued at quotedmarket value. At June 30, 2006, the fair value of theCompany's 12% Senior Secured Notes and Senior SecuredFloating Rate Notes was approximately $107.7 million compared tothe carrying value of $130.0 million (before original issuediscount) (Note 3). At June  30,  2005, the fairvalue of the Company’s 12% Senior Secured Notes, SeniorSecured Floating Rate Notes and the 10% Third Party SeniorSecured Notes was approximately $124.8  million compared to thecarrying value of $130.0  million (before original issuediscount) (Note 3).

Recent Accounting Pronouncements

InJune 2005 the FASB issued SFAS 154, ‘‘AccountingChanges and Error Corrections,’’ which replaces APB 20,‘‘Accounting Changes,’’ and SFAS 3,‘‘Reporting Accounting Changes in Interim FinancialStatements.’’ SFAS 154 applies to all voluntary changesin accounting principle, and changes the requirements for accountingfor and reporting of a change in accounting principle. SFAS 154

F-12

----

requires retrospective application to priorperiods’ financial statements of a voluntary change inaccounting principle unless it is impracticable. APB 20 previouslyrequired that most voluntary changes in accounting principle berecognized by including in net income of the period of the change thecumulative effect of changing to the new accounting principle. SFAS 154is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. Earlierapplication is permitted for accounting changes and corrections oferrors made in fiscal years beginning after June 1, 2005. Wewill adopt SFAS 154 on July  1,  2006 and we do not expectour adoption of this new standard to have a material impact on ourfinancial position, results of operations or cash flows.

InFebruary 2006 the FASB issued SFAS 155,‘‘Accounting for Certain HybridInstruments,’’ which amends SFAS 133,‘‘Accounting for Derivative Instruments and HedgingActivities,’’ and SFAS 140,‘‘Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.’’ SFAS 155allows financial instruments that have embedded derivatives to beaccounted for as a whole (eliminating the need to bifurcate thederivative from its host) if the holder elects to account for the wholeinstrument on a fair value basis. SFAS 155 also clarifies and amendscertain other provisions of SFAS 133 and SFAS 140. This statement iseffective for all financial instruments acquired or issued in fiscalyears beginning after September 15, 2006. We do not expect ouradoption of this new standard to have a material impact on ourfinancial position, results of operations or cash flows.

InJune 2006 the FASB issued Financial Interpretation No.(FIN) 48, ‘‘Accounting for Uncertainty inIncome Taxes.’’ FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109,‘‘Accounting for Income Taxes.’’ FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. It also provides guidance onderecognizing, classification, interest and penalties, accounting ininterim periods, disclosure, and transition. The requirements of FIN 48are effective for our fiscal year beginning July 1, 2007. We arein the process of evaluating this guidance and therefore have not yetdetermined the impact that FIN 48 will have on our financial positionor results of operations upon adoption.

3.    Reorganization Under Chapter 11

OnAugust 16, 2002, AETG, the Company and most of its wholly ownedsubsidiaries (the ‘‘Debtors’’) filed avoluntary petition for reorganization under Chapter 11 of the UnitedStates Bankruptcy Code (the ‘‘Code’’) inthe United States Bankruptcy Court (the ‘‘BankruptcyCourt’’).

Subsequent to the filing, the Companycontinued to operate its business under the Code as adebtor-in-possession (‘‘DIP’’).

TheBankruptcy Court confirmed the Debtor's Plan of Reorganization(‘‘POR’’) on September 4, 2003. OnDecember 24, 2003 the Debtors POR became effective and theCompany emerged from bankruptcy protection. As part of the emergencefrom Chapter 11, the Company obtained exit financing of approximately$145 million, including a $100 million revolving line ofcredit and a senior secured note of $45 million.

OnApril 23, 2004 the exit financing was repaid in full from thenet proceeds of $105.0 million 12% Senior Secured Notesand the $10.0 million Senior Secured Floating Rate Notes(collectively the ‘‘Notes’’) and$6.6 million from the Company’s new senior creditfacility (Note 10).

F-13

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As a result of the POR becoming effective,the Bankruptcy Court approved the settlement of liabilities that weresubject to compromise based upon the terms of the POR. The settlementresulted in the recognition of forgiveness of indebtedness income,based upon estimated settlement amounts, of approximately$102.9 million (including $1.4 million reflected in lossfrom discontinued operations) asfollows:

|                                    |  |  |                                                    |   |             |               |  |  |                                 |   |            |     |  |  |  |   |             |  |
|------------------------------------|--|--|----------------------------------------------------|---|-------------|---------------|--|--|---------------------------------|---|------------|-----|--|--|--|---|-------------|--|
|                               |  |  | Liabilitiessubjecttocompromiseat June 30,2003 |   |             | Consideration |  |  | Forgivenessofindebtednessincome |
| Under secureddebt                  |  |  |                                                    | $ | 128,240,000 |               |  |  |                                 | $ | 44,500,000 | (1) |  |  |  | $ | 83,740,000  |  |
| Secureddebt                        |  |  |                                                    |   | 20,582,771  |               |  |  |                                 |   | 20,582,771 |     |  |  |  |   | —     |  |
| Accruedinterest                    |  |  |                                                    |   | 7,039,288   |               |  |  |                                 |   | —    |     |  |  |  |   | 7,039,288   |  |
| Tradeand other miscellaneousclaims |  |  |                                                    |   | 14,103,665  |               |  |  |                                 |   | 1,981,664  | (2) |  |  |  |   | 12,122,001  |  |
| Prioritytaxclaims                  |  |  |                                                    |   | 5,626,002   |               |  |  |                                 |   | 5,626,002  | (3) |  |  |  |   | —     |  |
|                               |  |  |                                                    | $ | 175,591,726 |               |  |  |                                 | $ | 72,690,437 |     |  |  |  | $ | 102,901,289 |  |
|                                    |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Aspart of the Company's emergence from Chapter 11 and in accordancewith the POR, the Company paid $500,000 and issued 100% of theoutstanding common shares of AETG to holders of its$120.0 million outstanding 103⁄4% SeniorSecured Notes due 2004 and the holder of an $8.2 millionsupplemental loan (GSC). The distribution of stock was treated as acontribution of capital from AETG to the Company. The valuation of theshares was determined by using the enterprise value of the Companycalculated by an independent financial institution in connection withits valuation of warrants issued with the Notes. (Note 10) Thevaluation of the Company was determined using both the market multipleand discounted cash flow methods. The market multiple method used theactual EBITDA for the last fiscal year along with the projected EBITDAfor the next two fiscal years. Each EBITDA was factored by a selectedEBITDA multiple range (approximately 4.5x to 6.1x), as used inrepresentative financial transactions. The discounted cash flow methodused projected financial information through fiscal year 2008, aweighted average cost of capital of approximately 16% andterminal values calculated using an EBITDA multiple of 5.0x to arriveat a calculated enterprise value range. |

Thesecalculated values (from the market multiple and discounted cash flowmethods) were averaged to determine an enterprise value range, and themidpoint of this range, plus non-operating assets, is the concludedpoint estimate of the enterprise value, which was approximately$175 million. The Company's total debt was deducted fromthis point estimate of enterprise value to arrive at a net equityvalue. The concluded equity value estimate was calculated at$44 million by taking the $175 million enterprise valueless total debt as of December 23, 2003, which is the daypreceding the effective date of the Debtors' POR, increased by acontrol premium of 30%. The Company believes that AETG'senterprise value is approximately equal to the Company'senterprise value, as the Company represents substantially all ofAETG's operations. The concluded value of the warrants wascalculated at $2.7 million by first taking the$175 million enterprise value less total debt as ofApril 23, 2004, which is the day preceding issuance of theNotes, which resulted in a concluded equity value estimate ofapproximately $20 million. This $20 million was thenmultiplied by the warrants percentage of 15% and decreased by a10% marketability discount (since the warrants represent aminority equity position).

|     |                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes$1.1 million payable to general unsecured creditors in fourequal annual installments, which commenced in January2004. |

|     |                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------|
| (3) | Payable over six years from the dateof the assessment of these taxes, for which payment commencedMay  2005. |

In addition, certain claims in the Chapter11 bankruptcy case remain unsettled and are subject to ongoingnegotiation and possible litigation. As of June 30, 2006, theCompany had recorded 

F-14

----

approximately $4.8 million foroutstanding administrative priority claims that the Company is awareof, as of that date, as accounts payable, accrued expenses and otherliabilities.

Costs resulting from reorganization are reportedseparately in the statements of operations as reorganization costs. Forthe year ended June 30, 2004, these costs were $11,176,956including approximately $3,000,000 of success fees to professionals and$976,000 of exit bonuses to management and key employees. For the yearsended June  30,  2005 and 2006, these costs were $565,485and $568,905, respectively.

The impact of the accounting for thePOR did not result in the holders of existing equity shares receivingless then 50% of the equity shares post bankruptcy in eitherAETC or AETG, and accordingly, based upon the guidance in SOP 90-7, theCompany is not subject to fresh start accounting. Liabilities werereduced and a gain as a result of settlement of liabilities subject tocompromise was recognized. The Company's ability to fully utilizeits tax operating losses was impacted as a result of the debtcancellation.

4.    Receivable Agreement

InJune 2004, the Company entered into an agreement (the‘‘Receivable Agreement’’) with CongressFinancial Corporation (‘‘Congress’’), aspredecessor to Wachovia Bank, National Association(‘‘Wachovia’’) to sell Wachovia, withoutrecourse, up to a maximum $5.9 million of accounts receivable ofthe Company. Under the Receivable Agreement, Wachovia purchasesreceivables at the gross amount of such accounts (less three andone-quarter percent purchase commission) and immediately credits85% of this amount against the Company's debt under thenew senior credit facility with the balance credited upon Wachoviareceiving cumulative collections on all receivables purchased in excessof the purchase price previously credited. This agreement expiresconcurrently with the expiration of the new senior credit facility(Note 11). In connection with the Company entering into theReceivable Agreement, the President and Chief Executive Officer of theCompany has provided a personal guarantee in full support of theagreement, as required by Wachovia, for which he received a $125,000guarantee fee (Note 14). As of June 30, 2005 the Companyhad sold approximately $5.9 million of receivables and receivedcash proceeds of $4.8 million, net of applicable commissions. OnNovember  2,  2005 the Company amended this agreement withWachovia, to sell Wachovia, without recourse, up to a maximum$8.2  million of accounts receivable (the ‘‘AmendedReceivable Agreement’’). This increased amount isavailable to the Company from November  2,  2005 throughJuly  1,  2006. The President and Chief Executive Officerof the Company increased his personal guarantee to the new maximum andreceived an additional $50,000 guarantee fee. As of June30,  2006 the Company had sold approximately $7.5  millionof receivables and had received cash proceeds of $6.1 million,net of applicable commissions.

5.    Retainage

Pursuant to certain municipal school buscontracts and paratransit and transit contracts, certain contractualamounts (retainage) are withheld by customers from billings as aguarantee of performance by AETC. At June 30, 2005 retainage of$2,262,238 (net of $5,770,638, which was sold to Wachovia June28,  2005, without recourse under the receivable agreement (Note4) the total retainage was $8,032,876 prior to the sale to Wachovia)and retainage of $2,803,158 at June  30,  2006, areclassified as current accounts receivable, as they are normally paidwithin one year.

6.    Restricted Cash and CashEquivalents

Restricted cash and cash equivalents of $5,263,733and $3,728,146 at June  30,  2005 and June30,  2006 were pledged as collateral security for letters ofcredit outstanding in the amount of $8,843,851 as of June30,  2005 and $7,143,851 as of June  30,2006.

F-15

----

7.    Property, Plant andEquipment

Property, plant and equipment consists of thefollowing:

|                                                      |  |  |               |   |              |      |  |  |  |   |              |   |
|------------------------------------------------------|--|--|---------------|---|--------------|------|--|--|--|---|--------------|---|
|                                                 |  |  | June 30, |
|                                                 |  |  | 2005          |   |              | 2006 |
| Land                                                 |  |  |               | $ | 8,619,429    |      |  |  |  | $ | 4,408,096    |   |
| Buildingandimprovements                              |  |  |               |   | 23,478,126   |      |  |  |  |   | 15,318,306   |   |
| Transportationequipment                              |  |  |               |   | 222,923,377  |      |  |  |  |   | 203,844,359  |   |
| Transportationequipment acquired under capitalleases |  |  |               |   | 10,360,898   |      |  |  |  |   | 10,360,898   |   |
| Machineryandequipment                                |  |  |               |   | 38,139,835   |      |  |  |  |   | 38,767,601   |   |
| Furnitureandfixtures                                 |  |  |               |   | 4,791,255    |      |  |  |  |   | 4,892,535    |   |
|                                                 |  |  |               |   | 297,952,022  |      |  |  |  |   | 277,591,795  |   |
| Lessaccumulateddepreciation                          |  |  |               |   | (173,430,261 | )    |  |  |  |   | (184,113,873 | ) |
|                                                 |  |  |               | $ | 124,521,761  |      |  |  |  | $ | 93,477,922   |   |
|                                                      |

Basedupon proceeds from auction sales of vehicles and offers to purchase orsale of assets of certain of the Company’s operations theCompany has taken impairment losses of $5.7  million in 2006, towrite down these assets to their estimated fair value. This loss hasbeen included depreciation and amortization on the ConsolidatedStatement of Operations.

Accumulated depreciation of assets undercapital leases was $1,079,219 and $1,869,525 as of June30,  2005, and June  30,  2006,respectively.

8.    Marketable Securities —Restricted

The amortized cost and estimated fair value of themarketable securities are asfollows:

|                                                |  |  |                   |   |           |                     |  |  |           |   |        |  |  |  |  |   |           |  |
|------------------------------------------------|--|--|-------------------|---|-----------|---------------------|--|--|-----------|---|--------|--|--|--|--|---|-----------|--|
|                                           |  |  | June 30,2005 |
|                                           |  |  | Cost              |   |           | GrossUnrealizedGain |  |  | Fairvalue |
| Available forsale:                             |  |  |                   |   |      |                     |  |  |           |   |   |  |  |  |  |   |      |  |
| US Treasuryand other government debtsecurities |  |  |                   | $ | 4,476,602 | (1)                 |  |  |           | $ | 83,711 |  |  |  |  | $ | 4,560,313 |  |
|                                                |

|                                                |  |  |                   |   |           |                     |  |  |           |   |          |   |  |  |  |   |           |  |
|------------------------------------------------|--|--|-------------------|---|-----------|---------------------|--|--|-----------|---|----------|---|--|--|--|---|-----------|--|
|                                           |  |  | June 30,2006 |
|                                           |  |  | Cost              |   |           | GrossUnrealizedLoss |  |  | Fairvalue |
| Available forsale:                             |  |  |                   |   |      |                     |  |  |           |   |     |   |  |  |  |   |      |  |
| US Treasuryand other government debtsecurities |  |  |                   | $ | 4,593,520 | (1)                 |  |  |           | $ | (164,893 | ) |  |  |  | $ | 4,428,627 |  |
|                                                |

|  |
|--|
|  |  |
|  |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (1) | includedin accumulated other comprehensive income (loss). |

As ofJune  30,  2005 restricted cash and cash equivalents ofapproximately $5.3  million and marketable securities ofapproximately $4.6 million, are pledged as collateral for$8.8 million of letters of credit issued by AETC and as ofJune  30,  2006 restricted cash and cash equivalents ofapproximately $3.7  million and marketable securities ofapproximately $4.4 million, are pledged as collateral for$7.1 million of letters of credit issued by AETC.

Netrealized gains on marketable securities for the years endedJune 30, 2004 and 2005 were $167,483 and $3,277 respectively,and are included in the net revenues of the captive insurance company,which is considered a part of the school bus operations segment. Netrealized gains on marketable securities for the year ended June30,  2005 were $10,449 and net realized losses on marketablesecurities for the year ended June  30,  2006 were $30,645and are included in other income (expense) also in the school busoperations segment.

F-16

----

Contractual maturity dates of the abovesecurities are asfollows:

|                 |  |  |                   |   |           |                   |  |  |      |   |           |           |  |  |  |   |           |  |  |  |  |   |           |  |
|-----------------|--|--|-------------------|---|-----------|-------------------|--|--|------|---|-----------|-----------|--|--|--|---|-----------|--|--|--|--|---|-----------|--|
|            |  |  | June 30,2005 |   |           | June 30,2006 |
|            |  |  | Cost              |   |           | FairValue         |  |  | Cost |   |           | FairValue |
| 2006            |  |  |                   | $ | 126,531   |                   |  |  |      | $ | 126,694   |           |  |  |  | $ | —   |  |  |  |  | $ | —   |  |
| 2007            |  |  |                   |   | 280,803   |                   |  |  |      |   | 281,004   |           |  |  |  |   | —   |  |  |  |  |   | —   |  |
| 2008–2012 |  |  |                   |   | 370,373   |                   |  |  |      |   | 374,677   |           |  |  |  |   | 357,805   |  |  |  |  |   | 349,184   |  |
| 2013–2036 |  |  |                   |   | 3,698,895 |                   |  |  |      |   | 3,777,938 |           |  |  |  |   | 4,235,715 |  |  |  |  |   | 4,079,443 |  |
| Total           |  |  |                   | $ | 4,476,602 |                   |  |  |      | $ | 4,560,313 |           |  |  |  | $ | 4,593,520 |  |  |  |  | $ | 4,428,627 |  |
|                 |

9.    AccountsPayable, Accrued Expenses and Other Liabilities

Accountspayable, accrued expenses and other liabilities consist of thefollowing:

|                                                                        |  |  |         |   |            |      |  |  |  |   |            |  |
|------------------------------------------------------------------------|--|--|---------|---|------------|------|--|--|--|---|------------|--|
|                                                                   |  |  | June30, |
|                                                                   |  |  | 2005    |   |            | 2006 |
| Outstandingadministrative priority claims (primarily professionalfees) |  |  |         | $ | 7,012,813  |      |  |  |  | $ | 4,833,593  |  |
| Accountspayable                                                        |  |  |         |   | 4,308,940  |      |  |  |  |   | 5,629,955  |  |
| Payrolltaxes withheld andaccrued                                       |  |  |         |   | 2,488,484  |      |  |  |  |   | 1,927,608  |  |
| Otheraccrued expenses andtaxes                                         |  |  |         |   | 5,327,000  |      |  |  |  |   | 4,454,923  |  |
| Accruedemployeebenefits                                                |  |  |         |   | 4,924,228  |      |  |  |  |   | 9,376,836  |  |
| Total                                                                  |  |  |         | $ | 24,061,465 |      |  |  |  | $ | 26,222,915 |  |
|                                                                        |

10.    Debt

Thefollowing represents the debt outstanding at June 30, 2005 and2006:

|                                                                                                                           |  |  |         |   |             |      |  |  |  |   |             |   |
|---------------------------------------------------------------------------------------------------------------------------|--|--|---------|---|-------------|------|--|--|--|---|-------------|---|
|                                                                                                                      |  |  | June30, |
|                                                                                                                      |  |  | 2005    |   |             | 2006 |
| 12%Senior Secured Notes, due 2008 with cash interest payableOctober 15th andApril 15th(a)                       |  |  |         | $ | 105,000,000 |      |  |  |  | $ | 105,000,000 |   |
| SeniorSecured Floating Rate Notes, due 2008 with cash interest payableOctober 15th andApril 15th(a)             |  |  |         |   | 10,000,000  |      |  |  |  |   | 10,000,000  |   |
| Less:original issue discount associated with the issuance ofwarrants,net(a)                                               |  |  |         |   | (1,895,651  | )    |  |  |  |   | (1,217,391  | ) |
| Newsenior creditfacility(b)                                                                                               |  |  |         |   | 19,408,752  |      |  |  |  |   | 17,755,702  |   |
| 15%senior unsecured termnote(c)                                                                                           |  |  |         |   | 4,900,000   |      |  |  |  |   | 4,900,000   |   |
| Letterof creditadvance                                                                                                    |  |  |         |   | 3,500,000   |      |  |  |  |   | 3,500,000   |   |
| 10%Third Priority Senior Secured Notes due 2008 with cash interest payableOctober  15, and April  15th(d)                 |  |  |         |   | 15,048,809  |      |  |  |  |   | 15,168,474  |   |
| Less:original issue discount associated with the issuance ofwarrants,net(d)                                               |  |  |         |   | (801,371    | )    |  |  |  |   | (505,484    | ) |
| Variousnotes payable, primarily secured by transportation equipment, withinterest rates ranging from 8% –10.3% |  |  |         |   | 4,976,755   |      |  |  |  |   | 3,480,257   |   |
|                                                                                                                      |  |  |         |   | 160,137,294 |      |  |  |  |   | 158,081,558 |   |
| Lesscurrentportion                                                                                                        |  |  |         |   | 24,820,652  |      |  |  |  |   | 22,196,184  |   |
| Long-termdebt, net of currentportion                                                                                      |  |  |         | $ | 135,316,642 |      |  |  |  | $ | 135,885,374 |   |
|                                                                                                                           |

F-17

----

A summary of interest expense is asfollows:

|                                                 |  |  |               |   |            |      |  |  |      |   |            |  |  |  |  |   |            |  |
|-------------------------------------------------|--|--|---------------|---|------------|------|--|--|------|---|------------|--|--|--|--|---|------------|--|
|                                            |  |  | June 30, |
|                                            |  |  | 2004          |   |            | 2005 |  |  | 2006 |
| Continuingoperations:                           |  |  |               |   |       |      |  |  |      |   |       |  |  |  |  |   |       |  |
| Interestexpense, including pre-paymentpenalties |  |  |               | $ | 16,027,615 |      |  |  |      | $ | 19,723,472 |  |  |  |  | $ | 21,287,955 |  |
| Amortizationof deferred financingexpense        |  |  |               |   | 9,044,351  |      |  |  |      |   | 3,013,437  |  |  |  |  |   | 3,679,104  |  |
| Amortizationof original issuediscount           |  |  |               |   | 124,228    |      |  |  |      |   | 776,891    |  |  |  |  |   | 974,151    |  |
| Subtotal                                        |  |  |               |   | 25,196,194 |      |  |  |      |   | 23,513,800 |  |  |  |  |   | 25,941,210 |  |
| Discontinuedoperations:                         |  |  |               |   |       |      |  |  |      |   |       |  |  |  |  |   |       |  |
| Interestexpense, including pre-paymentpenalties |  |  |               |   | 804,686    |      |  |  |      |   | 15,184     |  |  |  |  |   | 44         |  |
| Amortizationof deferred financingexpense        |  |  |               |   | 105,876    |      |  |  |      |   | 1,831      |  |  |  |  |   | —    |  |
| Amortizationof original issuediscount           |  |  |               |   | 1,859      |      |  |  |      |   | 553        |  |  |  |  |   | —    |  |
| Subtotal                                        |  |  |               |   | 912,421    |      |  |  |      |   | 17,568     |  |  |  |  |   | 44         |  |
| Total                                           |  |  |               | $ | 26,108,615 |      |  |  |      | $ | 23,531,368 |  |  |  |  | $ | 25,941,254 |  |
| TotalContractualInterest                        |  |  |               | $ | 32,577,365 |      |  |  |      | $ | 23,531,368 |  |  |  |  | $ | 25,941,254 |  |
|                                                 |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | OnApril 22, 2004 AETC issued the Notes (Note 3). The netproceeds from the sale of the Notes, along with $6.6 millionfrom our new senior credit facility (see‘‘d’’ below) were used to repay in full ourexit financing facilities. The Notes were issued as part of aninvestment unit consisting of $1,000 principal amount of theoutstanding Notes and one warrant (the‘‘Warrants’’) to purchase one share of ourcommon stock at an exercise price of $0.01 per share.$2.7 million of the purchase price of the units was allocated tothe Warrants based upon a valuation by an independent financialinstitution. The original issue discount (the‘‘OID’’) is being amortized over the lifeof the Notes. |

Annual interest on the Senior SecuredFloating Rate Notes is equal to the applicable LIBOR rate plus a marginof 9.2%. The applicable LIBOR rate at June 30, 2006 was5.59%. Interest payments on the Notes, which are requiredsemi-annually through their maturity date, commenced onOctober 15, 2004. In addition, from and afterSeptember 30, 2006, the Company will be required to payadditional payment in kind (‘‘PIK’’)interest on the Notes of 2% per annum, since it will not meetthe leverage test required in the indenture.

Inconnection with the issuance of the Notes, the Company incurred$10.3 million of transaction costs, including$3.9 million of prepayment penalties, to repay the exitfinancing facilities.

The Notes and Warrants were notseparately transferable until the earliest to occur of 180 daysafter their issuance, or the date on which a registration statement fora registered exchange offer with respect to the Notes is declaredeffective under the Securities Act. The Notes were required to beregistered with the Securities and Exchange Commission (the‘‘SEC’’) by October 19, 2004. Sincethey were not registered by its given deadline, AETC was required topay liquidated damages until such registration became effective. TheCompany paid approximately $565,000 in liquidated damages. OnSeptember  1,  2005, the exchange offer was completed andthe liquidated damages ended. 

The originalindenture governing the Notes provides for optional redemption, arepurchase provision upon the existence of excess cash flow, as definedtherein, and contains covenants typical of such arrangements includingrestrictions on capital expenditures and acquisitions of indebtednessas well as a covenant on the maintenance of a minimum trailing twelvemonths EBITDA (‘‘LTM EBITDA’’) as definedtherein, of $23 million determined quarterly to begin with thequarter ending March  31,  2006.

OnMarch  31,  2006 the holders of a majority in principalamount of the Company’s 12% Senior Secured Notes due 2008and Senior Secured Floating Rate Notes due 2008 (collectively the

F-18

----

‘‘Notes’’)consented to amendments to the Indenture (the‘‘Supplemental Indenture’’) which(i) amended the definition of the term ‘‘AssetSale’’ to exclude the sale of accounts receivable;(ii) amended the definition of the term‘‘Permitted Indebtedness’’ to increase thesize of the permitted bank debt basket from $20.0  million to$30.0  million effective September  25,2006; (iii) amended the ‘‘Limitation on AssetSales’’ covenant to require the Company to apply80% of net cash proceeds of asset sales in excess of$10.0  million occurring after the date of the SupplementalIndenture to offer to repurchase the Notes and the 10% ThirdPriority Secured Notes due 2008 (the ‘‘Third PriorityNotes’’); (iv) amended the ‘‘Maintenance ofConsolidated EBITDA’’ covenant such that it will notapply until the four consecutive quarters ending December31,  2006 and will require minimum ‘‘ConsolidatedEBITDA’’, as defined in the Indenture governing theNotes, of $23.0  million. The holders of Third Priority SecuredNotes also consented to the same changes as the changes contained inthe Supplemental Indenture. No consideration was paid to the consentingholders.

The Notes and related subsidiary guarantees aresenior secured obligations and will rank equal in right of payment toall other existing and future senior indebtedness and senior in rightof payment to all of the Company's and its guarantorsubsidiaries' existing and future subordinated indebtedness. TheNotes are secured by a first priority lien on substantially all of theCompany's and its guarantor subsidiaries' unencumberedowned real properties and on substantially all of the Company'sand its guarantor subsidiaries' owned motor vehicles, and asecond priority lien on the Company's and its guarantorsubsidiaries' assets that secure their obligations under the newsenior credit facility on a first prioritybasis.

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Concurrently with the issuance of theNotes, the Company entered into a senior credit facility with Wachoviawith up to $20.0 million of borrowing availability under arevolving credit facility. In addition there was initially a$10.0 million letter of credit facility. Our senior creditfacility is secured by a first priority lien on substantially all ofthe Company's and all of its guarantor subsidiaries'assets, other than the first lien collateral and certain excludedassets, and by a second priority lien on the first lien real property.On September  19,  2006, the senior lender approved$10.0  million increase in the revolving creditfacility. |

The borrowing capacity under therevolving credit facility is based on 85% of the net amount ofour eligible accounts receivable. Loans under the revolving creditfacility bear interest at prime rate (the prime rate on June30,  2006 was 8.25%) plus 1% per annum or, if weelect, the LIBOR rate (the 3-month LIBOR rate on June  30,2006 was 5.59%) plus 3.25% per annum. However, the$3.5 million portion of our senior credit facility, which is thesupplemental loan amount, bears interest at 12% per annum.Letters of credit are subject to a fee of 2% per annum, payablemonthly in arrears, and any amounts paid by lenders for a letter ofcredit will bear the same rate as loans under our revolving facility.The Company paid a closing fee of $600,000 and is required to pay aservicing fee of $10,000 per month, plus pay Wachovia a monthly fee of0.5% on any unused portion of its senior credit facility. Oursenior credit facility contains an EBITDA maintenance covenant,limitations on capital expenditures, as well as other events ofdefault. From September 30, 2004 and through November 30,2004, the Company was in default of this EBITDA maintenance covenant.However, on January 5, 2005, the Company received a waiver fromWachovia of this EBITDA maintenance covenant under our senior creditfacility for the period from September 30, 2004 throughNovember 30, 2004. On August  15,  2005 our seniorcredit facility was amended to reset the EBITDA covenant through theend of the loan term to $23  million. Through June30,  2006 the Company was in compliance with this EBITDAcovenant. In connection with the extension of the maturity date of oursenior credit facility the EBITDA maintenance covenant was increased to$24.0  million at April  2007, $25.0  million at May2007 and $26.0  million at June  30,  2007 andthereafter.

On October 14, 2004, Wachoviaamended its senior credit facility to allow Wachovia to makenon-revolving supplemental loans to the Company of up to$3.5 million. These supplemental loans, which are not subjectedto borrowing base availability, do not increase the amount of the$20.0 million senior credit facility. GSC, the juniorparticipant to the supplemental loan, funded the $3.5 millionloan, which bears interest at 12% per annum, onOctober 14, 2004. Under the 

F-19

----

terms of the definitive documentation of thesupplemental loan, GSC may receive payment of the outstanding principalbalance of the supplemental loans if the Company's excessavailability, as defined in our senior credit facility, is not lessthan $5.0  million for the 30 day period immediately priorto the repayment of these loans and for each of the three business daysimmediately prior to the date of repayment of the loans. No principalpayments have been made to GSC under the supplement loans. OnSeptember  19,  2006 the senior lender approved theextension of this facility from April  23,  2007 toFebruary  29,  2008.

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c)  | OnAugust 5, 2004 the Company received $4,900,000 from GSC andsigned a senior unsecured term note (the ‘‘GSCNote’’). The GSC Note bears interest at 15% perannum and is payable monthly, in arrears, commencing August 31,2004 until September 2004 and quarterly, in arrears, thereafter.The GSC Note contains identical covenants as our senior credit facilityand matures the earlier of April 23, 2007 or such date as excessavailability as defined by our senior credit facility is in excess of$7.0 million, after giving effect to the repayment of principalof the GSC Note. In connection with this transaction, GSC, Wachovia andthe Company signed a subordination agreement, whereby the parties agreethat the Company may pay interest if excess availability is not lessthan $1.0 million and pay principal if excess availability is inexcess of $7.0 million, after giving effect to the respectiverepayments and no event of default (as defined in our senior creditfacility) shall exist or have occurred and be continuing. No principalpayments were made to GSC under the senior unsecured term note. OnOctober  17,  2005 this note was assigned to the holder ofthe Company’s $15.0 million third priority senior securednotes due 2008 (the ‘‘AdditionalIndebtedness’’). Interest payable was changed to annuallyon October  17,  2006 and quarterly thereafter. OnSeptember  21,  2006, the holder of this note agreed to anextension in the maturity date to February  22,2008. |

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (d)  | On March 3, 2005, concurrentlywith the execution of a supplemental indenture, the Company issued theAdditional Indebtedness. The Additional Indebtedness was issued withwarrants to acquire 40,752 shares, or 5%, of the Company'scommon stock (the ‘‘Additional Warrants’’).$0.9 million of the purchase price was allocated to theAdditional Warrants, which was based upon a valuation model prepared byan independent financial institution that was used for the Warrantsissued with the Notes. The original issue discount is being amortizedover the life of the Additional Indebtedness. In connection with theoffering of the Additional Indebtedness, the Company incurred$2.3 million of transaction costs. Interest on the AdditionalIndebtedness is 10% per annum in cash and PIK interest of1% per annum, payable semi-annually in arrears onApril 15 and October 15, which commenced onApril 15, 2005. The Additional Indebtedness is secured by athird priority lien on all of the Company's and its guarantorsubsidiaries' real property and a third priority lien on thoseassets that secure the Company and its guarantor subsidiaries'obligations under our senior credit facility on a first priority basis.The holders of the Additional Indebtedness are allowed to vote andconsent together as one class with the holders of the Notes, except inmatters regarding the registration rights agreement. Although theAdditional Indebtedness is not and will not be registered with the SEC,the Additional Warrants have registration rights. |

OnAugust 3, 2005, the Company announced its offer to exchange upto (i) $105.0 million in aggregate principal amount of its12% Series B Senior Secured Notes due 2008, which havebeen registered under the Securities Act of 1933, as amended, for itsoutstanding unregistered 12% Series A Senior SecuredNotes due 2008 and (ii) $10.0 million in aggregate principalamount of its Series B Senior Secured Floating Rate Notes due2008, which have been registered under the Securities Act of 1933, asamended, for its outstanding unregistered Series A SeniorSecured Floating Rate Notes due 2008. On August 31, 2005,Atlantic Express Transportation Corp. announced the successfulcompletion of this exchange offer.

F-20

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Aggregate yearly maturities oflong-term debt based upon payment terms as of June 30, 2006, areasfollows:

|                                        |  |  |  |   |             |  |
|----------------------------------------|--|--|--|---|-------------|--|
| 2007                                   |  |  |  | $ | 22,189,640  |  |
| 2008                                   |  |  |  |   | 135,699,022 |  |
| 2009                                   |  |  |  |   | 690,420     |  |
| 2010                                   |  |  |  |   | 648,854     |  |
| 2011                                   |  |  |  |   | 180,923     |  |
| Thereafter                             |  |  |  |   | 395,574     |  |
| Subtotal                               |  |  |  |   | 159,804,433 |  |
| Lessunamortized original issuediscount |  |  |  |   | 1,722,875   |  |
|                                   |  |  |  | $ | 158,081,558 |  |
|                                        |

11.    ObligationsUnder Capital Leases

During the year ended June 30, 2004,AETC entered into a Master Lease Agreement to acquire 161 vehicles foruse in its school bus transportation operations. Assets under thislease aggregated $9,411,511. Payment terms range from 60 to72 months, with skip payments in July, August and September eachyear, with interest added to the debt in the same months.

InOctober  2004, an additional nine vehicles were acquired at acost of $401,850 and in February  2005, an additional fifteenvehicles were acquired at a cost of $924,790 for use in its school bustransportation operations.

In July  2006, as part of theassets sold by T-NT six vehicles with a cost of $377,253 werereclassified to assets held for sale.

Future annual leasepayments under capital lease obligations as of June 30, 2006 areasfollows:

|                                                 |  |  |  |   |           |  |
|-------------------------------------------------|--|--|--|---|-----------|--|
| 2007                                            |  |  |  | $ | 1,921,269 |  |
| 2008                                            |  |  |  |   | 1,921,269 |  |
| 2009                                            |  |  |  |   | 1,600,811 |  |
| 2010                                            |  |  |  |   | 195,825   |  |
| 2011                                            |  |  |  |   | 101,978   |  |
| Total                                           |  |  |  |   | 5,741,152 |  |
| Amountrepresentinginterest                      |  |  |  |   | 775,073   |  |
| Presentvalue of future minimum leasepayments    |  |  |  |   | 4,966,079 |  |
| Current portion ofcapital leaseobligations      |  |  |  |   | 1,625,172 |  |
| Capitallease obligations, net of currentportion |  |  |  | $ | 3,340,907 |  |
|                                                 |

F-21

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Aggregate maturities under capital leaseobligations based upon payment terms as of June 30, 2006 are asfollows:

|       |  |  |  |   |           |  |
|-------|--|--|--|---|-----------|--|
| 2007  |  |  |  | $ | 1,625,172 |  |
| 2008  |  |  |  |   | 1,615,448 |  |
| 2009  |  |  |  |   | 1,463,680 |  |
| 2010  |  |  |  |   | 166,809   |  |
| 2011  |  |  |  |   | 94,970    |  |
| Total |  |  |  | $ | 4,966,079 |  |
|       |

12.    OtherExpense (income) — Other

Other expenses consisted of thefollowing for the year ended June  30,  2004, 2005 and2006.

|                                   |  |  |                        |   |         |      |  |  |      |   |           |   |  |  |  |   |           |   |
|-----------------------------------|--|--|------------------------|---|---------|------|--|--|------|---|-----------|---|--|--|--|---|-----------|---|
|                              |  |  | YearEndedJune 30, |
|                              |  |  | 2004                   |   |         | 2005 |  |  | 2006 |
| Loss(gain) on sale of fixed asset |  |  |                        | $ | (40,451 | )    |  |  |      | $ | 1,058,818 |   |  |  |  | $ | 1,128,930 |   |
| Interest(income)                  |  |  |                        |   | (45,057 | )    |  |  |      |   | (272,609  | ) |  |  |  |   | (374,959  | ) |
| Managementfee (income)            |  |  |                        |   | (21,000 | )    |  |  |      |   | (56,340   | ) |  |  |  |   | (56,520   | ) |
| GSCPmanagement fee expense        |  |  |                        |   | 232,512 |      |  |  |      |   | 400,000   |   |  |  |  |   | 400,000   |   |
| Miscellaneous.                    |  |  |                        |   | 15,762  |      |  |  |      |   | (33,497   | ) |  |  |  |   | 983       |   |
| Other                             |  |  |                        | $ | 141,766 |      |  |  |      | $ | 1,096,372 |   |  |  |  | $ | 1,098,434 |   |
|                                   |

13.    IncomeTaxes

The benefit from (provision for) income taxes consists ofthefollowing:

|               |  |  |                        |   |          |      |  |  |      |   |         |   |  |  |  |   |                                 |  |
|---------------|--|--|------------------------|---|----------|------|--|--|------|---|---------|---|--|--|--|---|---------------------------------|--|
|          |  |  | YearEndedJune 30, |
|          |  |  | 2004                   |   |          | 2005 |  |  | 2006 |
| Current:      |  |  |                        |   |     |      |  |  |      |   |    |   |  |  |  |   |                            |  |
| Federal       |  |  |                        | $ | —  |      |  |  |      | $ | — |   |  |  |  | $ |     — |  |
| Stateandlocal |  |  |                        |   | (104,800 | )    |  |  |      |   | (86,000 | ) |  |  |  |   | —                         |  |
| Deferred:     |  |  |                        |   | —  |      |  |  |      |   | — |   |  |  |  |   | —                         |  |
| Stateandlocal |  |  |                        |   | (372,000 | )    |  |  |      |   | 300,000 |   |  |  |  |   | —                         |  |
|          |  |  |                        | $ | (476,800 | )    |  |  |      | $ | 214,000 |   |  |  |  | $ | —                         |  |
|               |

Areconciliation of the statutory federal income tax rate to theeffective rate is asfollows:

|                                                                                           |  |  |                        |  |         |      |  |  |      |  |         |    |  |  |  |  |         |    |
|-------------------------------------------------------------------------------------------|--|--|------------------------|--|---------|------|--|--|------|--|---------|----|--|--|--|--|---------|----|
|                                                                                      |  |  | YearEndedJune 30, |
|                                                                                      |  |  | 2004                   |  |         | 2005 |  |  | 2006 |
| Federalincome taxrate                                                                     |  |  |                        |  | 34.0    | %    |  |  |      |  | 34.0    | %  |  |  |  |  | 34.0    | %  |
| Stateand local income taxes (net of federalbenefit)                                       |  |  |                        |  | 0.2     | %    |  |  |      |  | 0.3     | %  |  |  |  |  | — | %  |
| Decrease(increase) of valuationallowance                                                  |  |  |                        |  | (30.2   | )%   |  |  |      |  | (33.4   | )% |  |  |  |  | (48.4   | )% |
| Reorganizationcosts                                                                       |  |  |                        |  | 6.6     | %    |  |  |      |  | (0.4    | )% |  |  |  |  | (0.4    | )% |
| Discounton related party debtacquisition                                                  |  |  |                        |  | (8.1    | )%   |  |  |      |  | — | %  |  |  |  |  | — | %  |
| Effectof change in rate utilized to compute deferred tax balances anddeferred adjustments |  |  |                        |  | — | %    |  |  |      |  | — | %  |  |  |  |  | 13.5    | %  |
| Other                                                                                     |  |  |                        |  | (1.7    | )%   |  |  |      |  | — | %  |  |  |  |  | 1.3     | %  |
| Effectivetaxrate                                                                          |  |  |                        |  | 0.8     | %    |  |  |      |  | 0.5     | %  |  |  |  |  | 0.0     | %  |
|                                                                                           |

F-22

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Deferred tax assets (liabilities) arecomprised of thefollowing:

|                                  |  |  |                        |   |             |      |  |  |      |   |             |   |  |  |  |   |             |   |
|----------------------------------|--|--|------------------------|---|-------------|------|--|--|------|---|-------------|---|--|--|--|---|-------------|---|
|                             |  |  | YearEndedJune 30, |
|                             |  |  | 2004                   |   |             | 2005 |  |  | 2006 |
| Deferredtaxassets:               |  |  |                        |   |        |      |  |  |      |   |        |   |  |  |  |   |        |   |
| Allowancefor doubtfulreceivables |  |  |                        | $ | 601,000     |      |  |  |      | $ | 767,000     |   |  |  |  | $ | 764,000     |   |
| Lossand tax credit carryforwards |  |  |                        |   | 35,551,000  |      |  |  |      |   | 76,515,000  |   |  |  |  |   | 71,545,000  |   |
| Accruedexpenses andother         |  |  |                        |   | 4,065,000   |      |  |  |      |   | 3,436,000   |   |  |  |  |   | 4,379,000   |   |
|                             |  |  |                        |   | 40,217,000  |      |  |  |      |   | 80,718,000  |   |  |  |  |   | 76,688,000  |   |
| Deferredtaxliabilities:          |  |  |                        |   |        |      |  |  |      |   |        |   |  |  |  |   |        |   |
| Depreciation                     |  |  |                        |   | (27,979,000 | )    |  |  |      |   | (31,222,000 | ) |  |  |  |   | (15,061,000 | ) |
| Intangibleassets                 |  |  |                        |   | (1,527,000  | )    |  |  |      |   | (921,000    | ) |  |  |  |   | (823,000    | ) |
| Forgivenessof indebtednessincome |  |  |                        |   | (6,418,000  | )    |  |  |      |   | (16,480,000 | ) |  |  |  |   | (14,410,000 | ) |
|                             |  |  |                        |   | (35,924,000 | )    |  |  |      |   | (48,623,000 | ) |  |  |  |   | (30,294,000 | ) |
| Netdeferred taxasset             |  |  |                        |   | 4,293,000   |      |  |  |      |   | 32,095,000  |   |  |  |  |   | 46,394,000  |   |
| Valuationallowance               |  |  |                        |   | (5,215,000  | )    |  |  |      |   | (32,717,000 | ) |  |  |  |   | (47,016,000 | ) |
| Deferredtax liabilities(net)     |  |  |                        | $ | (922,000    | )    |  |  |      | $ | (622,000    | ) |  |  |  | $ | (622,000    | ) |
|                                  |

TheCompany had available, at June 30, 2006, net operating loss(‘‘NOL’’) carry forwards for regularfederal tax purposes of approximately $165  million (after thereduction described below) which expire during the years 2012 through2026. As described in Note 3, on December 24, 2003, theCompany's POR became effective and the Company emerged frombankruptcy protection. As a result of the reorganization, for federaland state income tax purposes, approximately $92.8 million ofindebtedness was considered cancelled. The cancellation and relatedtransactions resulted in a reduction of its available net operatingloss carry forwards of approximately $39.3 million, capital losscarry forwards of approximately $1.8 million and tax basis ofits depreciable assets of $15.1 million and non-depreciableassets 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 futureyears could be significantly limited.

14.    Related PartyTransactions

AETC incurred rent expense of $48,000, $35,200 and$0 for the years ended June 30, 2004, 2005 and 2006,respectively, in connection with the lease of real property from anaffiliate.

Upon the effectiveness of the POR onDecember 24, 2003, AETG and AETC entered into a managementservices agreement, with GSCP, Inc., an affiliate of GSC, aprincipal stockholder of the Company. Under the agreement,GSCP, Inc. agrees to advise and consult with our boards ofdirectors and management on certain business, operational and financialmatters and provides other advisory services. The agreement providesthat AETG and AETC will pay to GSCP, Inc. an annual fee of$500,000 for such services, $400,000 of which was allocated to theCompany. The management services agreement terminates when GSC ceasesto own any shares of common stock issued upon the effectiveness of thePOR. For the years ended June  30,  2004, 2005 and 2006,the Company incurred advisory costs of $232,512, $400,000 and $400,000,respectively, all of which remain unpaid.

On February 10,2004, the Company entered into a management agreement with AtlanticTransit II Corp. (‘‘ATC’’) and AtlanticSchool Bus Corp. (‘‘ASBC’’), subsidiariesof AETG. Under the agreement, the Company provides certainadministrative services on behalf of ATC and ASBC. The agreementprovides that ASBC will pay the Company a monthly fee of $30 per routevehicle. For the years ended June 30, 2004, 2005 and 2006 thecompany earned $21,000, $56,340 and $56,520 respectively. The assets ofASBC were sold in July of 2006 and this agreement has beenterminated.

In connection with the Company entering into theReceivable Agreement, as amended, the President and Chief ExecutiveOfficer of the Company has provided a personal guarantee in fullsupport of the agreement, as required by Wachovia, for which hereceived guarantee fees totaling $175,000 (See Note‘‘Receivable Agreement’’).

F-23

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CNY and JBS entered into an agreementwith Atlantic Bus Distributors, Inc.(‘‘ABD’’), a wholly owned subsidiary ofAETG, to order certain buses through ABD. Central is required todeposit 20% of the cost of these vehicles simultaneously withABD's receipt of these vehicles from the manufacturers and paythe balance to ABD upon Central's delivery of these vehicles toits customers or within 120 days, whichever comes first. Thepurchase price of each bus equals the price at which ABD purchased suchbus together with any costs incurred by ABD in connection with thepurchase of any such vehicles. The Company sold the assets of CentralNew York Coach Sales and Service, Inc. on August 18, 2003and closed Jersey Bus Sales, Inc. During the years endedJune 30, 2004, 2005 and 2006, total payments made by Centralunder this agreement were $19,116,476 and $0 and $0, respectively.

15.    Equity

On October  17,  2005, theCompany sold 293,663 shares of its Common Stock, $.01 par value pershare, to AETG for an aggregate purchase price of $4.9  million.The Company is a wholly owned subsidiary of AETG. AETG obtained$3.7  million of the proceeds of the $4.9  millioninvestment from GSC and $1.2  million from the holder of theAdditional Indebtedness (Note 10).

16.    Commitments andContingencies

Leases

Minimum rental commitments as ofJune 30, 2006 for non-cancelable equipment and real propertyoperating leases are asfollows:

|            |  |  |                             |   |            |                                  |  |  |       |   |            |  |  |  |  |   |             |  |
|------------|--|--|-----------------------------|---|------------|----------------------------------|--|--|-------|---|------------|--|--|--|--|---|-------------|--|
|       |  |  | YearEnded June 30,2006 |
|       |  |  | RealProperty                |   |            | Transportation andOtherEquipment |  |  | Total |
| 2007       |  |  |                             | $ | 6,253,167  |                                  |  |  |       | $ | 9,864,155  |  |  |  |  | $ | 16,117,322  |  |
| 2008       |  |  |                             |   | 5,380,136  |                                  |  |  |       |   | 9,552,664  |  |  |  |  |   | 14,932,800  |  |
| 2009       |  |  |                             |   | 4,943,816  |                                  |  |  |       |   | 7,546,978  |  |  |  |  |   | 12,490,794, |  |
| 2010       |  |  |                             |   | 4,704,290  |                                  |  |  |       |   | 6,142,903  |  |  |  |  |   | 10,847,193  |  |
| 2010       |  |  |                             |   | 3,878,824  |                                  |  |  |       |   | 4,747,373  |  |  |  |  |   | 8,626,197   |  |
| Thereafter |  |  |                             |   | 22,654,457 |                                  |  |  |       |   | 1,937,318  |  |  |  |  |   | 24,591,775  |  |
|       |  |  |                             | $ | 47,814,690 |                                  |  |  |       | $ | 39,791,391 |  |  |  |  | $ | 87,606,081  |  |
|            |

Totalrental charges amounted to $8,337,968, $10,214,299 and $16,009,791 forthe years ended June 30, 2004, 2005 and 2006,respectively.

Litigation

The Company is a defendant withrespect to various claims involving accidents and other issues arisingin the normal conduct of its business. Management and counsel believethe ultimate resolution of these matters will not have a materialimpact on the financial position or results of operations of AETC.There are various claims, which are insured under an automobileinsurance policy issued by Reliance National Indemnity Company(‘‘Reliance’’) for the periodFebruary 28, 1997 through December 31, 1998. Reliance isinsolvent and as such the New York Public Motor Vehicle Liability Fundis required to provide coverage in lieu of Reliance. InMay 2002, the New York State Insurance Department LiquidationBureau notified the Company that this fund is financially strained andwill be unable to provide defense or indemnification for claims, whicharose during the Reliance policy period. The Company has commenced anaction against the Superintendent of Insurance of New York to compelhim to provide coverage, however, any related claims will be settledunder the liabilities subject to compromise as a result of thereorganization.

Environmental

The Company is aware thatcertain properties and facilities it owns or operates may be subject toenvironmental remediation in the future due to the potential impact ofasbestos contaminating 

F-24

----

material and offsite issues such as leakingunderground storage tanks or previous or current industrial operations.In addition, the Company has recently received notices of violationsand potential violations related to certain environmental matters. TheCompany hired an environmental consultant, who completed Phase IEnvironmental Site Assessments on approximately seven of theCompany's properties. Based upon the reports of the environmentalconsultant, the Company believes that any penalty or remediation costwould not be material. In addition, the Company has recently settledtwo environmental claims for immaterial amounts. As a result,management and counsel do not believe that the penalties, if any, willbe material.

Outstanding Letters of Credit

Letters ofcredit totaling approximately $15.3  million and $13.6million related to the collateralization of self insurance deductiblesand worker's compensation insurance and automobile liabilityinsurance loss funds, were outstanding as of June 30, 2005 and2006, respectively.

Performance Security

AETC'stransportation contracts generally provide for performance security inone or more of the following forms: performance bonds, letters ofcredit or cash retainages.

In most instances, AETC has opted tosatisfy its security performance requirements by posting performancebonds. At June 30, 2005 and 2006 AETC has provided performancebonds aggregating approximately $53.1 million and $24.3million respectively.

Employment Agreements

AtJune 30, 2006, AETC has employment agreements with certainexecutives that require payments of $928,960 and $778,684 in fiscalyear 2007 and 2008 respectively.

Under an employment agreementdated November 25, 2003 with an executive, that executivereceives a cash exit bonus, upon a change in control, equal to the fairmarket value, as of the date of such change in control, of 1.5%of all issued and outstanding Company common shares immediatelyfollowing the effective date of the reorganization. The exit bonus isalso due and payable on a reduced basis, as defined, in the event theexecutive leaves the Company. In the event a change in control has notoccurred prior to December 31, 2010 the exit bonus is payableJanuary 1, 2011. The amount of this exit bonus accrued as ofJune 30, 2006, is $130,560.

The same executive received aperformance bonus of $500,000 for 2006, in connection with the new DOEextension agreement.

Under an employment agreement datedApril  1,  2006 with another executive, that executivereceives a cash exit bonus, upon a change in control, equal to the fairmarket value, as of the date of such change in control, of 0.5%of all issued and outstanding Company common shares immediatelyfollowing the effective date of the reorganization. The exit bonus isalso due and payable on a reduced basis, as defined, in the event theexecutive leaves the Company. In the event a change in control has notoccurred prior to December 31, 2010 the exit bonus is payableJanuary 1, 2011. No bonus was accrued as of June30,  2006 because the Company believes the amount is notmaterial.

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

An executive of the Company has entered into anagreement with the major shareholder of AETG whereby that executivewill receive a bonus that will be paid by that shareholder based uponthe value that shareholder receives as a result of the sale of theCompany.

17.    Retirement Plans

AETC sponsors a taxqualified 401(k) plan whereby eligible employees can invest up to15% of base earnings subject to a specified maximum amongseveral investment alternatives. An employer matching contribution upto a maximum of 2.5% of the employee's compensation isalso invested. 

F-25

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AETC's contributions wereapproximately $387,000, $362,000 and $384,000 for the years endedJune 30, 2004, 2005 and 2006, respectively.

AETC has aqualified Profit Sharing Plan for eligible employees (primarilydrivers, mechanics and escorts not covered by union deferredcompensation plans). AETC's contributions are based upon hoursworked. Participants are not allowed to make deferred contributions.AETC's contributions were approximately $68,000, $79,000 and$84,000 for the years ended June 30, 2004, 2005 and 2006,respectively.

The Company contributed to the pension plans ofvarious unions covering drivers, mechanics and other workers as part ofrelated union agreements. Such contributions amounted $5,840,000,$6,162,000 and $6,924,000 for the years ended June 30, 2004,2005 and 2006, respectively.

18.    Major Customer andConcentration of Credit Risk

For the years ended June 30,2004, 2005 and 2006, revenues derived from the DOE were thefollowing:

|                                         |  |  |                        |   |             |      |  |  |      |   |             |   |  |  |  |   |             |   |
|-----------------------------------------|--|--|------------------------|---|-------------|------|--|--|------|---|-------------|---|--|--|--|---|-------------|---|
|                                    |  |  | YearEndedJune 30, |
|                                    |  |  | 2004                   |   |             | 2005 |  |  | 2006 |
| Totalrevenues from continuingoperations |  |  |                        | $ | 363,520,687 |      |  |  |      | $ | 363,675,565 |   |  |  |  | $ | 414,458,068 |   |
| DOErevenues –$                    |  |  |                        | $ | 155,217,213 |      |  |  |      | $ | 160,830,952 |   |  |  |  |   | 211,565,437 |   |
| DOErevenues –%                    |  |  |                        |   | 42.70       | %    |  |  |      |   | 44.22       | % |  |  |  |   | 51.10       | % |
|                                         |

Asof June 30, 2005 and June  30,  2006, AETC hadaccounts receivable including retainage from the DOE of $15,102,816 and$20,711,605, respectively.

At June 30, 2005 and 2006,substantially all cash and cash equivalents were on deposit with onemajor financial institution. Deposits held with banks may exceed theamounts of insurance provided on such deposits.

Approximatelythree quarters of the Company's employees are subject to thirtycollective bargaining agreements that either will have or expire overthe next two to five years.

19.    Sales and LeasebackTransactions

On April  26,  2005, Metro Affiliates,Inc. a subsidiary of the Company sold a facility for a gross purchaseprice of $4,460,000 and leased back the same property for a period ofapproximately twenty years. The triple net lease, which is beingaccounted for as an operating lease, calls for monthly payments of$36,667 with annual increments of two percent. The gain on thetransaction was $2,465,150 and is being amortized over the leasebackperiod on a straight-line basis.

On July 6, 2005, 201 WestSotello Realty Inc., a subsidiary of the Company, completed the saleand leaseback of its owned real property located in Los Angeles,California. The sale and lease back was pursuant to theAgreement and Escrow Instructions for Purchase of Real Estate (the‘‘Agreement and Escrow Instructions’’) withS.R. Partners (the‘‘Buyer’’). Pursuant to theAgreement and Escrow Instructions, 201 West Sotello Realty Inc. sold tothe Buyer its owned real property located in Los Angeles, Californiafor a gross purchase price of $5,000,000. In connection with thesale of the property, Atlantic Express of L.A. Inc., a subsidiary ofthe Company, agreed to leaseback the premises from the Buyer for a termof approximately ten years. The triple net lease called for amonthly payment of $39,583 with annual increments of2.5%. Atlantic Express of L.A. Inc. is responsible forall real property taxes and certain insurance costs under the lease.The gain on this transaction was $737,268 and is being amortized overthe leaseback period on a straight-line basis.

OnJanuary 11, 2006, Midway Leasing, Inc.(‘‘Midway’’), a subsidiary of the Company,completed the sale and leaseback of its owned real property located inStaten Island, New York. Pursuant to the Contract of Sale, Midway soldto the purchaser its owned real property in Staten Island, New York fora gross purchase price of $4,200,000. In connection with thesale of the real property, the Company agreed to leaseback the premisesfrom the purchaser for a term of 10 years. The lease calls for

F-26

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monthly payments of $29,750 with annualincreases of 2.0%. The Company will be responsible for all realproperty taxes, certain insurance costs and utilities. TheCompany incurred a loss on the sale of approximately $0.9million.

20.    Subsequent Events

On July27,  2006, T-NT, a subsidiary of the Company, completed the saleof substantially all of its assets. Pursuant to the Contract of Sale,T-NT sold substantially all of its assets for a gross purchase price of$12.6  million. In addition, Domenic Gatto, the Company’spresident received $100,000 as consideration for entering into a fiveyear non-competition agreement. The Company will recognize a gain onthe sale of these assets of $5.8  million in the first quarter offiscal year 2007. Revenues from T-NT represented 2.4% and2.3% of total revenue and income (loss) before taxes represented(0.6)% and 1.0% for the years ended June30,  2005 and 2006, respectively. Due to immateriality, theseoperations were not presented as discontinued operations.

OnSeptember  19,  2006, our senior lender approved theextension of our senior credit facility to February  29,2008. The EBITDA LTM covenant was increased to $24.0  millioneffective April  2007, $25.0  million effective May2007 and $26.0  million effective June  30,  2007 andthereafter. In addition, the senior lender approved an increase in therevolving line of credit by $10.0.

On September  21,2006 the holder of the $4.9  million senior unsecured noteapproved an extension of in the maturity date from April23,  2007 to February  22,2008.

21.    Segment Information

The operatingsegments reported below are segments of the company for which separatefinancial information is available and for which operating results asmeasured by income from operations are evaluated regularly by executivemanagement in deciding how to allocate resources and in assessingperformance. The accounting policies of the business segments are thesame as those described in the Summary of Significant AccountingPolicies (Note 1).

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

School BusOperations provide services for the transportation of open enrollmentstudents through the use of standard school buses, and thetransportation of physically or mentally challenged students throughthe use of an assortment of vehicles, including standard school buses,passenger vans and lift-gate vehicles, which are capable ofaccommodating wheelchair-bound students.

Paratransit and TransitOperations provide paratransit service in New York and Arizona forphysically and mentally challenged persons who are unable to usestandard public transportation. The Company also reserved and scheduledpassenger service requests under our contract in Arizona. The remainderof our paratransit and transit operations revenue comes from fixedroute transit, express commuter line and charter and tour bus services.The contract in Arizona, which generated approximately 11.7% and5.7% of the revenues for our paratransit and transit operationsin fiscal years 2004 and 2005, respectively, expired inDecember 2004 and was not renewed.

F-27

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The summarized segment information(excluding discontinued operations), as of and for the years endedJune 30, 2004 and 2005 are asfollows:

|                             |  |  |                             |   |             |                                  |  |  |       |   |            |  |  |  |  |   |             |   |
|-----------------------------|--|--|-----------------------------|---|-------------|----------------------------------|--|--|-------|---|------------|--|--|--|--|---|-------------|---|
|                        |  |  | YearEnded June 30,2004 |
|                        |  |  | SchoolBusOperations         |   |             | Paratransit andTransitOperations |  |  | Total |
| Revenues                    |  |  |                             | $ | 321,465,664 |                                  |  |  |       | $ | 42,055,023 |  |  |  |  | $ | 363,520,687 |   |
| Costofoperations            |  |  |                             |   | 285,644,957 |                                  |  |  |       |   | 35,033,632 |  |  |  |  |   | 320,678,589 |   |
| Income(loss) fromoperations |  |  |                             |   | (8,300,217  | )                                |  |  |       |   | 1,697,596  |  |  |  |  |   | (6,602,621  | ) |
| Totalassets                 |  |  |                             |   | 233,320,706 |                                  |  |  |       |   | 21,459,733 |  |  |  |  |   | 254,780,439 |   |
| Capitalexpenditures         |  |  |                             |   | 18,566,304  |                                  |  |  |       |   | 668,872    |  |  |  |  |   | 19,235,176  |   |
| Depreciationandamortization |  |  |                             |   | 23,549,097  |                                  |  |  |       |   | 2,737,828  |  |  |  |  |   | 26,286,925  |   |
|                             |

|                             |  |  |                              |   |             |                                  |  |  |       |   |            |  |  |  |  |   |             |   |
|-----------------------------|--|--|------------------------------|---|-------------|----------------------------------|--|--|-------|---|------------|--|--|--|--|---|-------------|---|
|                        |  |  | Year Ended June 30,2005 |
|                        |  |  | SchoolBusOperations          |   |             | Paratransit andTransitOperations |  |  | Total |
| Revenues                    |  |  |                              | $ | 319,604,294 |                                  |  |  |       | $ | 44,071,271 |  |  |  |  | $ | 363,675,565 |   |
| Costofoperations            |  |  |                              |   | 298,907,448 |                                  |  |  |       |   | 38,490,635 |  |  |  |  |   | 337,398,083 |   |
| Income(loss) fromoperations |  |  |                              |   | (18,240,314 | )                                |  |  |       |   | 1,072,197  |  |  |  |  |   | (17,168,117 | ) |
| Totalassets                 |  |  |                              |   | 229,119,965 |                                  |  |  |       |   | 17,885,499 |  |  |  |  |   | 247,005,464 |   |
| Capitalexpenditures         |  |  |                              |   | 5,994,616   |                                  |  |  |       |   | 2,196,812  |  |  |  |  |   | 8,191,428   |   |
| Depreciationandamortization |  |  |                              |   | 23,904,131  |                                  |  |  |       |   | 2,084,100  |  |  |  |  |   | 25,988,231  |   |
|                             |

|                             |  |  |                             |   |             |                                  |  |  |       |   |            |  |  |  |  |   |             |   |
|-----------------------------|--|--|-----------------------------|---|-------------|----------------------------------|--|--|-------|---|------------|--|--|--|--|---|-------------|---|
|                        |  |  | YearEnded June 30,2006 |
|                        |  |  | SchoolBusOperations         |   |             | Paratransit andTransitOperations |  |  | Total |
| Revenues                    |  |  |                             | $ | 368,065,542 |                                  |  |  |       | $ | 45,992,526 |  |  |  |  | $ | 414,058,068 |   |
| Costofoperations            |  |  |                             |   | 329,669,220 |                                  |  |  |       |   | 39,474,226 |  |  |  |  |   | 369,143,446 |   |
| Income(loss) fromoperations |  |  |                             |   | (4,520,801  | )                                |  |  |       |   | 2,580,679  |  |  |  |  |   | (1,940,122  | ) |
| Totalassets                 |  |  |                             |   | 202,371,791 |                                  |  |  |       |   | 11,154,414 |  |  |  |  |   | 213,426,205 |   |
| Capitalexpenditures         |  |  |                             |   | 649,186     |                                  |  |  |       |   | 5,883,920  |  |  |  |  |   | 6,533,106   |   |
| Depreciationandamortization |  |  |                             |   | 26,563,349  |                                  |  |  |       |   | 1,635,979  |  |  |  |  |   | 28,199,328  |   |
|                             |

|                                                                                         |  |  |                        |   |         |      |  |  |      |   |         |   |  |  |  |   |         |   |
|-----------------------------------------------------------------------------------------|--|--|------------------------|---|---------|------|--|--|------|---|---------|---|--|--|--|---|---------|---|
|                                                                                    |  |  | YearsEndedJune 30 |
| Reconciliationto net income (loss)                                                      |  |  | 2004                   |   |         | 2005 |  |  | 2006 |
|                                                                                    |  |  | (Inthousands)          |
| Income (loss) fromoperations                                                            |  |  |                        | $ | (6,603  | )    |  |  |      | $ | (17,168 | ) |  |  |  | $ | (1,940  | ) |
| Forgivenessof indebtednessincome                                                        |  |  |                        |   | 101,493 |      |  |  |      |   | — |   |  |  |  |   | — |   |
| Interestexpense                                                                         |  |  |                        |   | (25,196 | )    |  |  |      |   | (23,514 | ) |  |  |  |   | (25,941 | ) |
| Reorganizationcosts                                                                     |  |  |                        |   | (11,177 | )    |  |  |      |   | (566    | ) |  |  |  |   | (569    | ) |
| Otherincome(loss)                                                                       |  |  |                        |   | (142    | )    |  |  |      |   | (1,096  | ) |  |  |  |   | (1,099  | ) |
| Income(loss) before benefit from (provision for) income taxes anddiscontinuedoperations |  |  |                        | $ | 58,375  |      |  |  |      | $ | (42,344 | ) |  |  |  | $ | (29,549 | ) |
|                                                                                         |

22.   SupplementalFinancial Information

AETC has no independent assets oroperations, the guarantees of the Notes are full and unconditional andjoint and several, and any subsidiaries of AETC other than thesubsidiary guarantors are minor, in accordance with Rule 3-10 ofRegulation S-X.

F-28

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23.    ValuationAllowances

|                                         |  |  |                             |   |            |                                       |  |  |            |   |            |                        |  |  |  |   |            |   |  |  |  |   |            |  |
|-----------------------------------------|--|--|-----------------------------|---|------------|---------------------------------------|--|--|------------|---|------------|------------------------|--|--|--|---|------------|---|--|--|--|---|------------|--|
|                                    |  |  | BalanceatBeginning ofPeriod |   |            | Additions-Charged toCostsand Expenses |  |  | Deductions |   |            | Balance at EndofPeriod |
| Year Ended June  30,2004                |  |  |                             |   |       |                                       |  |  |            |   |       |                        |  |  |  |   |       |   |  |  |  |   |       |  |
| Allowancefor doubtfulaccounts(1)        |  |  |                             | $ | 883,000    |                                       |  |  |            | $ | 241,000    |                        |  |  |  | $ | (211,000   | ) |  |  |  | $ | 1,335,000  |  |
| Valuationallowance for deferredtaxes(2) |  |  |                             | $ | 29,483,000 |                                       |  |  |            | $ | —    |                        |  |  |  | $ | 24,268,000 |   |  |  |  | $ | 5,215,000  |  |
| YearEnded June  30,2005:                |  |  |                             |   |       |                                       |  |  |            |   |       |                        |  |  |  |   |       |   |  |  |  |   |       |  |
| Allowancefor doubtfulaccounts(1)        |  |  |                             |   | 1,335,029  |                                       |  |  |            |   | 733,310    |                        |  |  |  |   | 363,490    |   |  |  |  |   | 1,704,849  |  |
| Valuationallowance for deferredtaxes(2) |  |  |                             |   | 5,215,000  |                                       |  |  |            |   | 27,502,000 |                        |  |  |  |   | —    |   |  |  |  |   | 32,717,000 |  |
| YearEnded June  30,2006:                |  |  |                             |   |       |                                       |  |  |            |   |       |                        |  |  |  |   |       |   |  |  |  |   |       |  |
| Allowancefor doubtfulaccounts(1)        |  |  |                             |   | 1,704,849  |                                       |  |  |            |   | 120,000    |                        |  |  |  |   | 64,539     |   |  |  |  |   | 1,760,310  |  |
| Valuationallowance for deferredtaxes(2) |  |  |                             |   | 32,717,000 |                                       |  |  |            |   | 14,299,000 |                        |  |  |  |   | —    |   |  |  |  |   | 47,016,000 |  |
|                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Deductionsfrom allowances represent losses or expenses for which the respectiveallowances were created. In the case of the allowances for doubtfulaccounts, such deductions are reduced by recoveries of amountspreviously written off. |

|     |                                                                                                                                                                                                                                                                                                                                                       |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Adjustmentsassociated with the Company's assessment of the deferred taxassets. For the year ended June  30,  2004 the valuationallowance was reduced by approximately $20.5 million dueprimarily to the pre-tax income effect of the forgiveness ofindebtedness income impacting the related federal and state netoperating loss carry forwards. |

F-29

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SIGNATURES

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, onSeptember  28,2006.

|        |  |  |                                     |  |  |                                             |
|--------|--|--|-------------------------------------|--|--|---------------------------------------------|
|   |  |  | AtlanticExpress TransportationCorp. |
|   |  |  | By:                                 |  |  | /s/Nathan Schlenker                         |
|   |  |  |                                |  |  | NathanSchlenker                             |
|   |  |  |                                |  |  | Chief FinancialOfficer                      |
|   |  |  |                                |  |  | (Principal Financial andAccounting Officer) |
|        |

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed byeach of the following persons on behalf of the Registrant and in thecapacities indicated on September  28,2006.

|                 |  |                                                                            |  |  |
|-----------------|--|----------------------------------------------------------------------------|--|--|
| SIGNATURE       |  | TITLE                                                                      |  |  |
|                 |
|                 |  |                                                                            |  |  |
|                 |
| PeterFrank      |
|                 |
|                 |  | Director, Chief Executive Officer andPresident(Principal ExecutiveOfficer) |  |  |
|                 |
| DomenicGatto    |
|                 |
|                 |  | Director                                                                   |  |  |
|                 |
| MatthewKaufman  |
|                 |
|                 |  | Director                                                                   |  |  |
|                 |
| AdamDraizin     |
|                 |
|                 |  | Chief FinancialOfficer(Principal Financial and AccountingOfficer)          |  |  |
|                 |
| NathanSchlenker |
|                 |

----