10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2004

Commission file number 0-22056

Rural/Metro Corporation

(Exact name of registrant as specified in its charter)

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

8401 East Indian School Road, Scottsdale, Arizona 85251

(Address of principal executive offices) (Zip Code)

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

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

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

Common Stock, par value $.01 per share

Preferred Stock Purchase Rights

(Title of Class)

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

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

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

As of December 31, 2003, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sales price of such stock as of such date on the Nasdaq SmallCap Market was $32,585,000. Shares of Common Stock held by each officer and director and by each person who owned 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.

As of September 15, 2004, there were 22,065,916 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS		1
PART I
ITEM 1.	BUSINESS	2
ITEM 2.	PROPERTIES	16
ITEM 3.	LEGAL PROCEEDINGS	16
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	18
PART II
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	19
ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA	20
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	56
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	99
ITEM 9A.	CONTROLS AND PROCEDURES	99
ITEM 9B.	OTHER INFORMATION	99
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	100
ITEM 11.	EXECUTIVE COMPENSATION	100
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	100
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	100
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	100
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	101
SIGNATURES		107

FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

Forward Looking Statements. Statements in this Report that are not historical facts are hereby identified as “forward looking statements” as that term is used under the securities laws. We caution readers that such “forward looking statements,” including those relating to our future business prospects, working capital, accounts receivable collection, liquidity, cash flow, insurance coverage and claims reserves, capital needs, operational results and compliance with debt facilities, wherever they appear in this Report or in other statements attributable to us, are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the “forward looking statements.” You should consider such “forward looking statements” in light of various important factors, including those set forth below and others set forth from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

These “forward looking statements” are found throughout this Report. Additionally, the discussions herein under the captions “Business — Introduction”, “Business — Market Reform and Changing Reimbursement Regulations”, “Business — Other Governmental Regulations”, “Business — Shared Services”, “Business — Billings and Collections”, “Legal Proceedings”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are susceptible to the risks and uncertainties discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.” Moreover, we may from time to time make “forward looking statements” about matters described herein or other matters concerning us. We disclaim any intent or obligation to update “forward looking statements.”

All references to “we,” “our,” “us,” or “Rural/Metro” refer to Rural/Metro Corporation, and its predecessors, direct and indirect subsidiaries, and affiliates. Rural/Metro Corporation, a Delaware corporation, is strictly a holding company. All services, operations and management functions are provided through its subsidiaries and affiliated entities. The website for Rural/Metro Corporation is located at www.ruralmetro.com.

For a discussion of certain risks associated with our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report and, specifically, “Risk Factors” included in such Item 7.

PART I

ITEM 1. Business

Introduction

Founded in 1948, we are a leading provider of medical transportation and related services, which include emergency and non-emergency ambulance and alternative transportation services to municipal, residential, commercial and industrial customers. We also provide fire protection services and other safety and health care related services, which include dispatch, fleet services and home health services. We believe we are the only multi-state provider of both ambulance and fire protection services in the United States and that we rank among the largest private-sector providers of ambulance and fire protection services in the world. We currently serve approximately 400 communities in 23 states. Revenues for these services are primarily derived from fees charged for medical transportation and fire protection services.

We provide medical transportation services under contracts with governmental entities, hospitals, health care facilities and other health care organizations. We primarily derive our revenue under these contracts through reimbursements under private insurance programs and government programs such as Medicare and Medicaid and reimbursement from a variety of governmental entities, as well as through fees paid directly by patients utilizing our services. Fire protection services are provided on a subscription-fee basis to residential or commercial property owners or under contracts with municipalities, fire districts or other agencies.

We expanded our business significantly from the late 1970s through the late 1990s through internal growth and acquisitions. This growth, consisting primarily of mergers and acquisitions in the 1990s as part of a consolidation of the domestic ambulance industry, provided us with significant market presence throughout the United States (“U.S.”), as well as parts of Latin America and Canada. To manage this growth, we invested in the development of management and operating systems in order to achieve productivity gains. While we believe that our prior growth strategy has created a strong platform of core businesses, commencing in fiscal year 2000, we focused on strengthening those core businesses and improving economies of scale. This focus included: (i) sustaining and enhancing positive cash flow performance, (ii) improving the quality and collectibility of medical transportation service revenue, (iii) reducing bad debt expense, and (iv) growth through same-service area expansion and targeted new opportunities. Our current business strategy includes continued emphasis on these focal points and on delivering high-quality, efficient and effective services to our customers and patients.

Industry Overview

Medical Transportation Business

Based on generally available industry data, it is estimated that expenditures for ambulance services in the U.S. were between $7 billion and $9 billion in 2004. The medical transportation industry in the U.S. is segmented into two market types: emergency and non-emergency services. Public-sector entities, private companies, hospitals and volunteer organizations provide ambulance services. Public-sector entities also often serve as the co-responder to requests for emergency ambulance services and often provide initial patient stabilization in addition to emergency medical transportation. Private sector entities provide the majority of non-emergency ambulance services. According to the Journal of Emergency Medical Services annual survey, it is estimated that the emergency medical services industry includes approximately 15,300 service providers including approximately 6,800 fire department-based providers; 1,100 hospital-based providers; and 7,400 private, third-service or other type of non-fire/non-hospital based provider organization. Approximately 60 percent of 9-1-1 ambulance transports in the nation’s largest 200 cities are provided by non-government services. Most providers are small organizations serving one or a limited number of markets. Several multi-state providers, including us, have emerged through the acquisition and consolidation of smaller ambulance service providers in recent years.

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Fire Protection Business

Municipal fire departments, tax-supported fire districts, and volunteer fire departments constitute the principal providers of fire protection services in the U.S. In most of the communities served by municipal fire departments and tax-supported fire districts, the fire department is a co-responder to a call for emergency medical services. According to the U.S. Fire Administration, approximately 30,000 fire departments operate throughout the U.S., of which approximately 26,000 are volunteer fire departments. Volunteer fire departments range from departments consisting entirely of volunteer personnel to departments that utilize one or more paid personnel located at each station supplemented by volunteers who proceed directly to the fire scene. In addition to providing fire protection services to subscribing municipalities and tax-supported fire districts, we and other members of the private sector provide fire protection services to large industrial complexes, airports, petrochemical plants, power plants and other self-contained facilities. We also provide wild land fire fighting services on a seasonal basis generally under contracts and, as requested, by various forestry and governmental agencies.

Based on our experience, we believe that our ambulance and fire protection services are complementary and benefit us by providing diversification, shared resources, experience and competitive advantages in certain service areas.

Historical Growth in Medical Transportation Service Expenditures; Primary Demand Factors

Medical transportation service expenditures in the U.S. have grown as a result of an increase in the number of transports and an increase in the average expenditures per transport. Several primary factors are cited for the increase and continued demand of the emergency and non-emergency transportation services we provide:

• The U.S. population is aging. People over the age of 65 years generally require more frequent hospital and ambulance services. The need for ambulance services is increasing with the aging of the Baby Boomer population; according to the U.S. Census Bureau, about 62 million Americans will be age 65 or older in 2025 compared to 35 million today. Such increase in demand affects all of our operations and is more pronounced in operations such as Arizona and Florida that serve higher concentrations of the elderly population.

• Size, growth and geographic distribution of the population also affect the medical transportation industry. Local population increases and urban sprawl create added demand for medical transportation services and a steady, corresponding growth rate. Moreover, there is an increased incidence in the level of health and accident risks associated with a growing population. In most cases, we believe that the current assets and resources of our existing operations can service the demand created by this growth, without need for significant additional capital expenditures.

• The increased availability of emergency service, the impact of educational programs on its use, and the frequency by which some members of the population utilize hospital emergency rooms for medical care also have increased the number of ambulance transports.

• Increased patient travel between specialized treatment health care facilities has created a greater demand for non-emergency medical transportation services.

• The greater use of outpatient care facilities and home care in response to health care cost containment efforts also has increased medical transport usage.

• The continuing demand for highly responsive emergency services, driven by regulatory and market forces, has further necessitated an increase in expenditures to maintain and enhance emergency medical systems. High-quality medical care and response time criteria require ambulance service providers to acquire sophisticated emergency medical, dispatch and related systems and equipment, recruit and retain highly trained personnel, and create advanced emergency management protocols. Average expenditures per transport have increased incrementally as a result of the additional costs to meet these criteria and maintain high-performance systems.

We believe that we are well situated to capitalize on the needs of the industry due to our emphasis on providing an effective, quality-care service model, as enhanced by cost efficiencies and centralized support functions derived from our local and national economies of scale.

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Consolidation of the Medical Transportation Industry

During the 1990s, the fragmented nature of the U.S. medical transportation industry, combined with limited capital and management systems that typified many smaller providers, offered an opportunity to consolidate the industry with the goal of achieving improved productivity and enhanced levels of service. As a result, we and several other entities began consolidating the ambulance industry through mergers and acquisitions of smaller providers. Thereafter, as the industry became less fragmented and acquisition opportunities diminished, the number of acquisitions slowed. We incurred significant debt in order to compete for acquisition targets and subsequently fund integration. Accordingly, we are a highly leveraged company and face certain risk factors related to our debt structure. See Risk Factors — “We have significant indebtedness.” However, we believe that our timely participation in the consolidation of the industry has provided us with a strong domestic platform of core operations with a substantial revenue base and a marketable reputation for quality service. We believe this enables us to capitalize on our position as a leader in the industry and build upon our business in existing service areas.

Competition

The medical transportation service industry is highly competitive. Principal participants include governmental entities (including fire districts), other national ambulance service providers, large regional ambulance service providers, hospitals, and numerous local and volunteer private providers. Counties, municipalities, fire districts, hospitals, or health care organizations that presently contract for ambulance services may choose to provide ambulance services directly in the future. In addition, many of our contracts with governmental entities contain termination provisions for cause or without cause. We experience continuing competition from municipal fire departments in providing emergency ambulance service. However, we believe that the non-emergency transport services market currently is unattractive to municipal fire departments. Some of our competitors may have greater capital and other resources than us and may not be subject to the same level of regulatory oversight.

We believe that counties, fire districts, and municipalities consider quality of care, historical response time performance and cost to be among the most important factors in awarding a contract, although other factors, such as customer service, financial stability and personnel policies and practices, also may be considered. Although commercial providers often compete intensely for business within a particular community, it is generally difficult to displace a provider that has a history of satisfying the quality of care and response time performance criteria established within the service area. Moreover, significant start-up costs, together with the long-term nature of the contracts under which services are provided and the relationships many providers have within their communities, create barriers for entry into new markets other than through acquisition. We further believe that our status as an emergency ambulance service provider in a service area increases our visibility and stature, and enhances our ability to compete for non-emergency services within such areas.

In the fire protection industry, services for residential and commercial properties are provided primarily by tax-supported fire districts, municipal fire departments and volunteer departments. Private providers, such as us, represent a small portion of the total fire protection market and generally provide fire protection services where a tax-supported fire district or municipality has decided to contract for the provision of fire protection services or has not assumed financial responsibility for fire protection. Fire districts or municipalities may not continue to contract for fire protection services. In certain areas where no governmental entity has assumed financial responsibility for providing fire protection, we provide fire protection services on a subscription basis. Municipalities may annex a subscription area or that area may be converted to a fire district that provides service directly, rather than through a master contract.

Market Reform and Changing Reimbursement Regulations

Market reform and the passage of the Balanced Budget Act of 1997, along with other regulatory changes, have impacted and reshaped the health care delivery system in the U.S. and, by extension, the medical transportation industry. As with all other health care providers, emergency medical service providers, like us, must comply with various requirements in order to participate in Medicare and Medicaid. Medicare is a federal health insurance program for the elderly and for chronically disabled individuals, which, among other things, pays for ambulance services when medically necessary.

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Medicaid is a combined federal-state program for medical assistance to impoverished individuals who are aged, blind, or disabled or members of families with dependent children. Medicaid programs or a state equivalent exist in all states in which we operate. Although Medicaid programs differ in certain respects from state to state, all are subject to federal requirements. State Medicaid agencies have the authority to set levels of reimbursement within federal guidelines. We receive only the reimbursement permitted by Medicaid and are not permitted to collect from the patient any difference between our customary charge and the amount reimbursed.

Like other Medicare and Medicaid providers, we are subject to governmental audits of our Medicare and Medicaid reimbursement claims. We take our compliance responsibilities very seriously. We have a national corporate compliance department that works closely with senior management, local managers, billing and collections personnel and both the human resources and legal departments, as well as governmental agencies to ensure substantial compliance with all established regulations and procedures. Nevertheless, despite our best efforts, there can be no assurance that we can achieve 100% compliance at all times, particularly in light of the complicated and ever-changing nature of the reimbursement regulations, and the high volume of daily transports we provide nationwide. Failure to comply may lead to a significant penalty or lower levels of reimbursement, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. From time to time, we have taken corrective action to address billing inconsistencies, which we have identified through our periodic internal reviews of billing procedures or which have been brought to our attention through governmental examination of our records and procedures. These matters cover periods prior to and after our acquisition of operations. As part of our commitment to working with those governmental agencies responsible for enforcement of Medicare and Medicaid compliance, we have voluntarily self-disclosed billing issues identified at some of our operations. For example, we self-disclosed Medicare overpayments from 1997 and 1998 in our former Scranton, Pennsylvania operation to the Office of the Inspector General. The billing practices that resulted in the Medicare overpayments were instituted by the former owners of that operation. We discovered the inconsistencies after acquiring the operation and promptly instituted new billing practices. Due to the nature of our business and our participation in the Medicare and Medicaid reimbursement programs, we are routinely subject to regulatory reviews and/or inquiries by governmental agencies. We expect these regulatory agencies to continue their practice of performing periodic reviews related to our industry. We fully cooperate with such federal and state agencies to provide requested information and to incorporate any recommended modifications of our existing compliance programs.

Government funding for health care programs is subject to statutory and regulatory changes, administrative rulings, interpretations of policy and determinations by intermediaries and governmental funding restrictions, all of which could materially impact program reimbursements for ambulance services. In recent years, Congress has consistently attempted to curb federal spending on such programs. In June 1997, the Health Care Financing Administration, now renamed the Centers for Medicare and Medicaid Services, issued proposed rules that would revise Medicare policy on the coverage of ambulance services. The proposed rules were the result of a mandate under the Balanced Budget Act of 1997 to establish a national fee schedule for payment of ambulance services that would control increases in expenditures under Part B of the Medicare program, establish definitions for ambulance services that link payments to the type of services furnished, consider appropriate regional and operational differences and consider adjustments to account for inflation, among other provisions.

Prior to April 1, 2002, when the national fee schedule began a five-year phase-in, Medicare used a charge-based reimbursement system for ambulance services and reimbursed 80% of charges determined to be reasonable, subject to the limits fixed for the particular geographic area. The patient was responsible for co-pay amounts, deductibles and the remaining balance if we did not accept the assigned reimbursement, and Medicare required us to expend reasonable efforts to collect the balance. In determining reasonable charges, Medicare considered and applied the lowest of various charge factors, including the actual charge, the customary charge, the prevailing charge in the same locality, the amount of reimbursement for comparable services or the inflation-indexed charge limit.

On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54 (which is adjusted each year by the Consumer Price Index, or “CPI”) plus separate mileage charges based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on

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Medicare claims, which means a provider must accept Medicare’s allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient.

Originally, the Final Rule called for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The national fee schedule was to be phased in at 20-percent increments each year, with payments being made at 100 percent of the national fee schedule in 2006 and thereafter.

With the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, modifications were made to the phase in of the ambulance fee schedule. Effective July 1, 2004, a regional fee schedule component of reimbursement is being phased in with the original national fee schedule. In addition, the new legislation extended the phase-in period to 2010. Under the new rules, the Medicare allowable reimbursement rate will be the greater of (a) the national fee schedule, or (b) a blend of the national fee schedule and the regional fee schedule. For 2004 that blended rate will be 20% of the national fee schedule and 80% of the regional fee schedule. For each succeeding year through 2007, the percentages will increase 20% for the national fee schedule and decrease 20% for the regional fee schedule portions of the blended rate. For 2008 and 2009, the fee schedule will remain at the 2007 mix of 80% national and 20% regional. In addition to the fee schedule changes, a provision for additional reimbursement for ambulance services was provided to Medicare patients. Among other relief, the Act provides for a 1% increase in reimbursement for urban transports and a 2% increase for rural transports for the remainder of the original phase-in period of the national ambulance fee schedule, or through 2006. Although we expect this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will benefit the portion of Rural/Metro’s medical transportation revenue that is reimbursed through Medicare, we are currently unable to predict the total impact.

Reimbursement by Medicare accounted for 28%, 27% and 25% of our domestic net ambulance fee collections for 2004, 2003 and 2002, respectively.

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

Other Governmental Regulations

Our business is also subject to other governmental regulations at the federal, state, local and foreign levels. At the federal level, we are subject to regulations under the Occupational Safety and Health Administration designed to protect our employees, and regulations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) which protects the privacy of patients’ health information handled by health care providers. The federal government also recommends standards for ambulance design and construction, medical training curriculum and designation of appropriate trauma facilities, and regulates our radio licenses. Various state agencies may modify these standards or require additional standards.

Each state where we operate regulates various aspects of its ambulance and fire business. These regulations may vary widely from state to state. State requirements govern the licensing or certification of ambulance service providers, training and certification of medical personnel, the scope of services that may be provided by medical personnel, staffing requirements, medical control, medical procedures, communication systems, vehicles and equipment. State or local government regulations or administrative policies regulate rate structures in certain states in which we conduct ambulance operations. The process of determining rates includes cost reviews, analyses of levels of reimbursement from all sources and determination of reasonable profits. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract as well as establishes the rates for general ambulance services that we are permitted to charge.

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Applicable federal, state and local laws and regulations are subject to change. We believe that we currently are in substantial compliance with applicable regulatory requirements. These regulatory requirements, however, may require us in the future to increase our capital and operating expenditures in order to maintain current operations or initiate new operations. See “Risk Factors — Certain state and local governments regulate rate structures and limit rates of return,” “— Numerous governmental entities regulate our business,” and “— Health care reforms and cost containment may affect our business”.

Our Current Service Areas

We currently provide our services in approximately 400 communities in the following 23 states:

Alabama	Kentucky	North Dakota	Washington
Arizona	Louisiana	Ohio	Wisconsin
California	Mississippi	Oregon
Colorado	Nebraska	Pennsylvania
Florida	New Jersey	South Dakota
Georgia	New Mexico	Tennessee
Indiana	New York	Texas

We provide ambulance services in each of these states primarily under the names Rural/Metro Ambulance or Rural/Metro Medical Services, and in New Mexico and certain areas of Arizona under the name Southwest Ambulance. In Oregon, North Dakota, Wisconsin and Louisiana we exclusively provide fire protection services. We also operate under other names depending upon local statutes or contractual agreements. We provide fire protection services under the name Rural/Metro Fire Department in 10 states, and also in Oregon under the name Valley Fire Services.

We generally provide our ambulance services pursuant to a contract or certificate of necessity on an exclusive or nonexclusive basis. We provide emergency ambulance services primarily pursuant to contracts or as a result of providing fire protection services. In certain service areas, we are the only provider of both emergency ambulance and non-emergency ambulance services. In other service areas, we compete for non-emergency ambulance contracts.

Medical Transportation Services

Emergency Ambulance Services

We generally provide emergency ambulance response and medical transportation services pursuant to contracts with counties, fire districts and municipalities. These contracts typically appoint us as the exclusive provider of emergency ambulance services in designated service areas and require us to respond to every emergency medical call in those areas. The level of response to the call is dependent upon the underlying contract. We typically respond to virtually all calls with Advanced Life Support (“ALS”) ambulance units, unless otherwise specified by contract.

ALS ambulances are staffed with either two paramedics or one paramedic and an emergency medical technician (“EMT”) and are equipped with ALS equipment (such as cardiac monitors, defibrillators, advanced airway equipment and oxygen delivery systems) as well as pharmaceuticals and medical supplies.

Upon arrival at an emergency medical call, the ALS crew members deploy portable life support equipment, ascertain the patient’s medical condition, and if required, administer advanced life support techniques and procedures that may include tracheal intubation, cardiac monitoring, defibrillation of certain cardiac dysrhythmias and the administration of medications and intravenous solutions under the direction of a physician. The crew also may perform Basic Life Support (“BLS”) services, which include cardiopulmonary resuscitation (“CPR”), basic airway management and basic first aid including splinting, spinal immobilization, recording of vital signs and other non-invasive procedures. As soon as medically appropriate, the patient is placed on a portable gurney and transferred into the ambulance. While one crew member monitors and treats the patient, the other crew member drives the ambulance to a hospital designated either by the patient or the applicable medical protocol. While on scene or en route, the ambulance crew

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alerts the hospital regarding the patient’s medical condition, and if necessary, the attending ambulance crew member seeks advice from an emergency physician as to treatment. Upon arrival at the hospital, the patient generally is taken to the emergency department where care is transferred to the emergency department staff.

Non-Emergency Ambulance Services

We also provide non-emergency ambulance services to patients requiring either advanced or basic levels of medical supervision and treatment during transfer to and from residences, hospitals, long-term care centers and other health care facilities. These services may be provided when a home-bound patient requires examination or treatment at a health care facility or when a hospital patient requires tests or treatments (such as MRI testing, CAT scans, dialysis, or chemotherapy) at another facility. We utilize ALS or BLS ambulance units to provide non-emergency ambulance services, depending on the patient’s needs. We generally staff our BLS ambulance units with two EMTs and equip these units with medical supplies and equipment necessary to administer first aid and basic medical treatment.

We provide ambulance services, critical care transports and non-medical transportation services pursuant to contracts with non-emergency governmental agencies, health care facilities or at the request of a patient. Such services may be scheduled in advance or are provided on an as-needed basis. Contracts with managed care organizations provide for reimbursement on a per-transport basis or on a capitated basis under which we receive a fixed fee, per person, per month.

Critical Care Transport Services

We provide critical care transport services to medically unstable patients (such as cardiac patients and neonatal patients) who require critical care while being transported between health care facilities. Critical care services differ from ALS services in that the ambulance may be equipped with additional medical equipment and may be staffed by a medical specialist provided by us or by a health care facility to attend to a patient’s special medical needs. Typically, staffing may include the use of critical care trained professional nurses, respiratory therapists, neo-natal nurse specialists and/or specially trained paramedics.

Alternative Transport Services

In addition to ambulance services, we provide non-medical transportation for the handicapped and certain non-ambulatory persons in very limited service areas. Such transportation generally takes place between residences or nursing homes and hospitals or other health care facilities. In providing this service, we typically utilize vans that contain hydraulic wheelchair lifts or ramps.

Disaster Response Teams

Aside from our day-to-day operations, we maintain disaster response teams that are occasionally called upon by state, county and local governments to assist in responding to local or national fire and medical emergencies. For example, at the request of the New York State Emergency Medical Services Bureau, we provided assistance for the efforts in New York City following the September 11, 2001 terrorist attacks on the World Trade Center. In addition, following the September 11, 2001 terrorist attack on the Pentagon, we responded to requests to move patients from area hospitals to outlying facilities, thereby clearing hospital beds for more seriously injured patients. We staff these emergencies based upon available resources from our existing pool of employees and equipment around the country, committing resources in a manner that is designed to avoid any interruption of service in our existing service areas. Such services are typically paid for and provided on a fee-for-service basis pursuant to contracts with the requesting agency or governmental entity.

Medical Personnel and Quality Assurance

Paramedics and EMTs must be state certified in order to perform emergency care services. Certification as an EMT requires completion of a minimum of 164 hours of training in a program designated by the U.S. Department of Transportation and supervised by state authorities. EMTs also may complete advanced training courses to become certified to provide certain additional emergency care services, such as administration of intravenous fluids and advanced airway management. In addition to completion of the EMT training program, the certification as a paramedic requires the completion of more than 800 hours of training in advanced patient care assessment,

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pharmacology, cardiology and clinical and field skills. Many of the paramedics currently employed by us served as EMTs for us prior to their certification as paramedics. We are subject to market-specific shortages of qualified EMTs and paramedics. We compete with hospitals, municipal fire departments and other health care providers for these valued individuals. We have undertaken efforts to minimize the effect of these shortages and have implemented a number of programs to attract and retain a quality workforce, such as providing training programs, recruitment bonuses, moving allowances and various other retention strategies. Both paramedics and EMTs must complete continuing education programs and, in some cases, state supervised refresher training examinations to maintain their certifications. Certification and continuing education requirements for paramedics and EMTs vary among states and counties.

We maintain a commitment to provide high quality pre-hospital emergency medical care. Local physician advisory boards and medical directors develop medical protocols to be followed by paramedics and EMTs in a service area. Instructions are conveyed on a case-by-case basis through direct communications between the ambulance crew and hospital emergency room physicians during the administration of advanced life support procedures. In each location in which we provide services, a medical director, who usually is a physician associated with a hospital we serve, monitors adherence to medical protocol and conducts periodic audits of the care provided. In addition, we conduct retrospective care audits with our employees to evaluate compliance with medical and performance standards

We are members of a number of professional organizations, namely, the American Ambulance Association, National Emergency Number (911) Association, International Association of Fire Chiefs and National Association of EMS Physicians. In those states where we provide service, we are involved in the state ambulance association, if one exists, and in many instances our involvement includes holding elected positions. In addition, we also are involved in the Commission on Accreditation of Ambulance Services (“CAAS”), the National Registry of Emergency Medical Technicians, the National Fire Protection Association, and the ASTM International. Also, many of our employees are members of the National Association of EMTs, National Association of EMS Educators and other EMS organizations. We were one of the first ambulance service providers to obtain accreditation for many of our larger ambulance operations from CAAS. The process is voluntary and evaluates numerous qualitative factors in the delivery of services. Municipalities and managed care providers often consider accreditation as one of the criteria in awarding contracts.

Fire Protection Services

Fire protection services consist primarily of fire prevention, fire suppression, and first responder medical care. We provide various levels of fire protection services, ranging from fire stations that are fully staffed 24 hours per day to reserve stations. We generally provide subscription-based fire protection services to unincorporated areas. Additionally, we provide fire protection services by contract to airports and industrial complexes. Federal and state governments contract with us on a regular basis to suppress wild land fires.

We have placed fire prevention and education in the forefront of our fire protection services and have developed a comprehensive program to prevent and minimize fires. We believe that successful fire protection requires the intensive training of personnel, the effective utilization of fire equipment, the establishment of first-rate communication centers for the receipt of emergency calls and the dispatch of equipment and personnel, the establishment and enforcement of strict fire codes and community educational efforts.

Fire Protection Personnel

Our ability to provide our fire protection services at relatively low costs results from our efficient use of personnel in addition to our fire prevention efforts. Typically, personnel costs represent more than two-thirds of the cost of providing fire protection services. We have been able to reduce our labor costs through a system that utilizes full-time firefighters complemented by paid part-time reservists as well as a modified every other day shift schedule. By using trained reservists on an as-needed basis, we have the ability to supplement full-time firefighters on a cost-effective basis.

All full-time and reserve firefighters undergo extensive training which exceeds the standards recommended by the National Fire Protection Association, and must qualify for state certification before being eligible for full-time employment by us. Because approximately 70% to 80% of our fire response activity consists of emergency medical response, all of our full-time firefighters are trained EMTs or paramedics. Ongoing training includes instruction in new fire service tactics and fire fighting techniques as well as continual physical conditioning.

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Each year we respond to an increasing number of specialty rescues. For this reason, in certain of our fire operations we operate a Special Operations Rescue Team comprised of firefighters who have advanced training in hazardous materials, water rescue, high and low angle and rope rescue, and confined space rescue.

Fire Response

An alarm typically results in the dispatch of one or more engine companies (each of which consists of an engine and two to four firefighters, including a captain), a fire chief, and such other personnel and equipment as circumstances warrant. The amount of equipment and personnel depends upon the type, location, and severity of the incident. We utilize our dispatch capabilities to reposition equipment and firefighters to maximize the availability and use of resources in a cost-effective manner.

Fire Prevention

We believe that fire prevention programs result in both lower fire loss and significant overall cost savings. Our fire prevention programs include recommendations for and the encouragement of various fire prevention methods, including fire code design, building design to inhibit the spread of fire, the design of automatic fire suppression sprinklers, fire detector and smoke detector installations, the design of monitoring and alarm systems, the placement and inspection of fire hydrants, fire code inspection and enforcement, and the determination of fire cause and origin in arson suspected fires. In addition, our personnel perform community education programs designed to reduce the risk of fire and increase our community profile.

Wild Land Fire Protection Services

We provide wild land fire protection services when requested by the federal government through federal and state agencies, and other governmental entities to assist in responding to fire emergencies. We staff these emergencies based upon available resources from our existing pool of employees and equipment around the country, committing resources in a manner that is designed to avoid any interruption of service in our existing service areas. Such services are typically paid for and provided on a fee-for-service basis pursuant to contracts with the requesting agency or governmental entity.

Industrial Fire Protection Services

We provide fire protection services and, on a limited basis, unarmed security services to large industrial complexes, petrochemical plants, power plants, and other self-contained facilities. The combination of fire protection services with security services in large industrial complexes has the potential to provide for greater efficiency and utilization in the delivery of such services and to result in reduced cost to our industrial customers for such services. We have contracts ranging up to three years in duration and expiring at various dates up to October 31, 2007 to provide firefighting and hazardous materials response services at locations in several states. We intend to pursue similar contracts in the future.

Aircraft Rescue And Fire Fighting Services (“ARFF”)

We also provide aircraft rescue and firefighting services at a variety of airports throughout the U.S. In addition to aircraft rescue and fire fighting services, we also provide structural firefighting and emergency medical response for airport terminals. Our ARFF firefighters have completed comprehensive professional training programs. Our personnel are cross-trained as EMTs or paramedics, as well as in hazardous materials response. Our capabilities include value-added services such as co-responder medical service in support of local fire departments for in-terminal medical emergencies, safety training for fuel handlers and other airport personnel, fire prevention activities, security services and testing and maintenance of fire suppression equipment.

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Contracts

We enter into contracts with counties, municipalities, fire districts and other governmental entities to provide emergency ambulance services in designated service areas. These contracts typically specify maximum fees that we may charge and set forth required criteria, such as response times, staffing levels, types of vehicles and equipment, quality assurance, indemnity and insurance coverage. In certain instances, we are required by contract or by law to post a surety bond or other assurance of financial or performance responsibility. The rates that we may charge under a contract for emergency ambulance services depends largely on patient mix; the nature of services rendered; the local political climate; and the amount of subsidy, if any, that will be considered by a governmental entity to cover costs of uncompensated care. We have no one contract that accounted for more than 10% of our annual net revenue during fiscal years 2004, 2003 or 2002. Our four largest ambulance contracts combined accounted for approximately 14%, 14% and 13% of net revenue during fiscal years 2004, 2003 and 2002, respectively.

We provide fire protection services on a subscription basis or pursuant to master contracts. We provide fire protection services on a subscription basis in areas where no governmental entity has assumed the financial responsibility for providing fire protection. We derived approximately 53%, 50% and 50% of our fire protection service revenue from subscriptions in fiscal years 2004, 2003 and 2002, respectively. Fire subscription rates are not currently regulated by any governmental agency in our service areas. Master contracts provide for negotiated rates with governmental entities. Certain contracts are performance-based and require us to meet certain dispatch and response times in a certain percentage of responses. These contracts also set maximum thresholds for variances from the performance criteria. These contracts establish the level of service required and may encompass fire prevention and education activities as well as fire suppression. Other contracts are level-of-effort based and require us to provide a certain number of personnel for a certain time period for a particular function, such as fire prevention or fire suppression.

Our contracts generally extend for terms of two to five years. We attempt to renegotiate contracts in advance of the expiration date and generally have been successful in these renegotiations. From time to time, we may decide that certain contracts are no longer favorable and may seek to modify or terminate these contracts. The following table sets forth certain information regarding our six largest contracts, based on revenue, during fiscal 2004 with counties, fire districts, and municipalities for ambulance services and for fire protection services.

	Term In Years	Expiration Date	Type of Service (1)
Ambulance
Orange County, Florida (2)	4	October 2006	Emergency/General
Rochester, New York (3)	4	September 2006	Emergency/General
Knox County, Tennessee (4)	5	July 2007	Emergency/General
Fort Worth, Texas (5)	6	August 2010	Emergency/General
Community Fire
Scottsdale, Arizona (6)	3	June 2005	Fire Protection
Public/Private Alliance
San Diego, California (7)	5	June 2005	Emergency/General

(1) Type of service for ambulance contracts indicates whether emergency or general ambulance services or both are provided within the service area.

(2) The contract was first entered into in 1962 by a provider that was acquired by us in July 1984.

(3) The contract was first entered into in 1988 by a provider that was acquired by us in May 1994.

(4) The contract was first entered into in July 1985.

(5) The contract was first entered into in August 1999. The contract has six one-year renewal options.

(6) The contract was first entered into in 1952. We have notified the City of Scottsdale that we elected not to renew the contract effective June 30, 2005.

(7) The contract was first entered into in May 1997 and is effective through June 2005. The contract has a three-year renewal option exercisable by our customer.

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We also enter into contracts with hospitals, nursing homes, and other health care facilities to provide non-emergency and critical care ambulance services. These contracts typically designate us as the preferred provider of non-emergency ambulance services to those facilities and typically permit us to charge a base fee, mileage reimbursement, and additional fees for the use of particular medical equipment and supplies.

Counties, fire districts, and municipalities generally award contracts to provide emergency ambulance services either through requests for competitive proposals or bidding processes. In some instances in which we are the incumbent provider, the county or municipality may elect to renegotiate our existing contract rather than re-bid the contract. We will continue to seek to enter into public/private alliances to compete for new business.

We market our non-emergency medical transportation services to hospitals, health maintenance organizations, convalescent homes, and other health care facilities that require a stable and reliable source of medical transportation for their patients. We believe that our status as an emergency medical transportation provider in a designated service area increases our visibility and enhances our marketing efforts as we compete for non-emergency services in that area. Contracts for non-emergency services usually are based on criteria similar to those in contracts for emergency services, including quality of care, customer service, response time, and cost.

We market our fire protection services to subscribers in rural and suburban areas, volunteer staffed fire departments, tax-supported fire districts, and large industrial complexes, petrochemical plants, power plants, airports, and other self-contained facilities. Subscription fees are generally collected annually in advance. In the event that we provide service for a non-subscriber, we directly bill the property owner for the cost of services rendered. We also provide fire protection services to newly developed communities where the subscription fee may be included in the homeowner’s association assessment.

Shared Services

We utilize sophisticated management information systems, which we believe enhance the productivity of our existing operations. These systems permit us to achieve efficiencies in the areas of billings, collections, purchasing, finance, cash management, human resources, compliance, informational systems, legal, risk management, and in the utilization of personnel and equipment.

Our centralized systems significantly augment local processes and permit managers to direct their attention primarily to the performance and growth of their operations. Centralized billing and collection procedures provide for more efficient tracking and collection of accounts receivable. Centralized purchasing permits us to achieve discounts in the purchase of medical equipment and supplies. Other centralized infrastructure components such as accounts payable, legal, compliance, human resources and risk management provide the capability to purchase related products and services on a national basis, identify and respond to national trends, and provide internal support and administrative services in a more cost-effective, efficient and consistent manner across all operations. We provide services and allocate costs for these centralized systems pursuant to administrative services agreements with each of our direct and indirect wholly owned subsidiaries. Accordingly, each subsidiary’s operational management has the ultimate responsibility and decision-making authority for the utilization and direction of these corporate services, so as to best serve the needs of their individual markets.

We believe our investment in management information systems and our effective use of these systems represent key components of our success. Process and personnel improvements in these areas are continuing. We are committed to further strengthening the productivity and efficiency of our business and believe that our management systems have the capability to support future growth.

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Dispatch and Communications

We use system status plans and flexible deployment systems to position our ambulances within a designated service area because effective fleet deployment represents a key factor in reducing response times and efficient use of resources. We analyze data on traffic patterns, demographics, usage frequency and similar factors with the aid of computers to help us determine optimal ambulance deployment and selection. The center that controls the deployment and dispatch of ambulances in response to calls for ambulance service may be owned and operated either by the applicable county or municipality or by us. Most of our control centers utilize computer hardware, software and sophisticated communications equipment, and maintain responsibility for fleet deployment and utilization 24 hours a day, seven days a week.

Depending on the emergency medical dispatch system used in a designated service area, the public authority that receives 911 emergency medical calls either dispatches our ambulances directly from the public control center or communicates information regarding the location and type of medical emergency to our control center, which in turn dispatches ambulances to the scene. In most service areas, our control center receives the call from the police after the police have determined the call is for emergency medical services. When we receive a 911 call, we dispatch one or more ambulances directly from our control center while the call taker communicates with the caller. All call takers and dispatchers are trained EMTs or Emergency Medical Dispatchers with additional training that enables them to instruct a caller on pre-arrival emergency medical procedures, if necessary. In our larger control centers, a computer assists the dispatcher by analyzing a number of factors, such as time of day, ambulance location, and historical traffic patterns in order to recommend optimal ambulance selection. In all cases, a dispatcher selects and dispatches the ambulance. While the ambulance is en route to the scene, the emergency medical team receives information concerning the patient’s condition prior to arrival at the scene. Also, in various operations across the country, we use automated vehicle locator technology in the vehicles to enhance our dispatch system.

In the delivery of emergency ambulance services, our communication systems allow the ambulance crew to communicate directly with the destination hospital to alert hospital medical personnel of the arrival of the patient and the patient’s condition, and to receive instructions directly from emergency department personnel on specific pre-hospital medical treatment. These systems also facilitate close and direct coordination with other emergency service providers, such as the appropriate police and fire departments that also may be responding to a call.

Deployment and dispatch also represent important factors in providing non-emergency ambulance services. We implement system status plans for these services designed to assure appropriate response times to non-emergency calls. We have developed extensive customer service models that enable our communications centers to meet these customer needs. We have established such procedures based on patient condition, specialized equipment needed and the level of care that will be required by the patient.

We utilize communication centers in our community fire protection activities for the receipt of fire alarms and the dispatch of equipment and personnel that are the same as or similar to those maintained for our ambulance services. Response time represents an important criteria in the effectiveness of fire suppression, which is dependent on the level of protection sought by our customers in terms of fire station spacing, the size of the service area covered and the amount of equipment and personnel dedicated to fire protection.

Billings and Collections

We currently maintain 10 regional billing and payment processing centers and a centralized private-pay collection system at our headquarters in Scottsdale, Arizona. Invoices are generated at the regional level, and the account is processed by the centralized collection system for private-pay accounts only if payment is not received in a timely manner. Customer service is directed from each of the regional centers. Throughout fiscal 2004, substantially all of our revenue was billed and collected through our integrated billing and collection system, except for our operations in Rochester, New York, which billed and collected revenue through an independent billing and collections system. Effective July 1, 2004, the Rochester regional billing and payment processing center converted to the integrated billing and collection system.

We derive a substantial portion of our ambulance fee collections from reimbursement by third-party payers, including payments under Medicare, Medicaid and private insurance programs, typically invoicing and collecting payments directly to and from those third-party payers. We also collect payments directly from patients, including payments under deductible and co-insurance provisions and otherwise. The composition of our net ambulance fee collections is as follows:

	2004		2003		2002
Medicare	28	%	27	%	25	%
Medicaid	14	%	14	%	12	%
Private insurers	48	%	49	%	51	%
Patients	10	%	10	%	12	%
	100	%	100	%	100	%

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Companies in the ambulance service industry maintain significant provisions for doubtful accounts compared to companies in other industries. Collection of complete and accurate patient billing information during an emergency service call is sometimes difficult, and incomplete information hinders post-service collection efforts. In addition, it is not possible for us to evaluate the creditworthiness of patients requiring emergency transport services. Our allowance for doubtful accounts generally is higher with respect to revenue derived directly from patients than for revenue derived from third-party payers and generally is higher for transports resulting from emergency ambulance calls than for non-emergency ambulance requests. See “Risk Factors — We depend on reimbursements by third-party payers and individuals”.

We have substantial experience in processing claims to third-party payers and employ a billing staff trained in third-party coverage and reimbursement procedures. Our integrated billing and collection system uses proprietary software to tailor the submission of claims to Medicare, Medicaid and certain other third-party payers and has the capability to electronically submit claims to the extent third-party payers’ systems permit. Our integrated billing and collection system provides for tracking of accounts receivable and status pending payment, which facilitates the utilization of personnel resources to resolve workload distribution. When billing individuals, we sometimes use an automated dialer that pre-selects and dials accounts based on their status within the billing and collection cycle, which we believe enhances the efficiency of the collection staff.

State licensing requirements as well as contracts with counties, municipalities and health care facilities typically require us to provide ambulance services without regard to a patient’s insurance coverage or ability to pay. As a result, we often receive partial or no compensation for services provided to patients who are not covered by Medicare, Medicaid or private insurance. The anticipated level of uncompensated care and uncollectible accounts may be considered in determining a government-paid subsidy to provide for uncompensated care, if any, and permitted rates under contracts with a county or municipality.

Insurance and Surety Bonding

Many of our contracts and certain provisions of local law require us to carry specified amounts of insurance coverage. We carry a broad range of comprehensive general liability, automobile, property damage, professional, workers’ compensation and other liability insurance policies that are renewed annually. As a result of the nature of our services and the day-to-day operation of our vehicle fleet, we are subject to accident, injury and professional claims in the ordinary course of business. We operate in some states that adhere to a gross negligence standard for the delivery of emergency medical care, which potentially lessens our exposure for tort judgments.

Based upon historical claim trends, we consider our insurance program adequate for the protection of our assets and operations. Our insurance policies are either occurrence or claims-made policies and are subject to certain deductibles and self-insured retention limits. The coverage limits of our policies may not be sufficient, we may experience claims within our deductibles or self-insured retentions in amounts greater than anticipated, or our insurers may experience financial difficulties that would require us to pay unanticipated claims. In addition, insurance may not continue to be available on commercially reasonable terms. A successful claim or claims against us in excess of our insurance coverage, or claims within our deductibles or self insured retentions in amounts greater than anticipated, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation. We have attempted to minimize our claims exposure by instituting process improvements and increasing the utilization of experts in connection with our legal, risk management and safety programs. One such safety program is our Driver Development Program (“DDP”). DDP uses the Coaching Emergency Vehicle Operator (“CEVO”) program, which is sponsored by the National Safety Council and is nationally recognized as drivers’

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training for emergency services vehicle operators. The program consists of training in the classroom as well as field training, and the curriculum includes, among other topics, instruction related to staging, proper inspection of the vehicles and driving in emergency settings. We modified and enhanced CEVO based on our analysis of over ten years of vehicle incidents as well as drivers’ experiences. We began developing the program in December 2002 and began training in July 2003.

Counties, municipalities and fire districts sometimes require us to provide a surety bond or other assurance of financial and performance responsibility. We may also be required by law to post a surety bond as a prerequisite to obtaining and maintaining a license to operate. As a result, we have a portfolio of surety bonds that is renewed annually. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

Employees

At June 30, 2004, we employed approximately 8,400 full-time and part-time employees. From this total, the breakdown of the workforce is comprised of approximately 5,200 employees involved in medical transport services, 1,200 in fire protection services, 130 in urgent home medical care, 370 in dispatch/communications and 1,500 in management, administrative, clerical and billing activities. We are party to a total of eleven collective bargaining agreements in the following locations: Rochester, New York; Buffalo, New York; Corning, New York; Youngstown, Ohio; San Diego, California; Gadsden, Alabama; Knoxville, Tennessee; Seattle, Washington; and three agreements in Arizona. Five of these agreements, covering approximately 1,000 employees, are scheduled to expire at various times over the next two years. We consider our relations with our employees to be good.

Strategy

Our strategy is to continue strengthening our existing core businesses and to continue building upon our economies of scale, while providing the most proficient levels of medical transportation and related services possible for the customers and communities we serve. Over the past year, our efforts to strengthen our business have been primarily focused on; (i) growing the core ambulance business in existing regional service areas, (ii) reducing bad debt expense through documentation and billing-oriented initiatives, (iii) managing payroll costs as a percentage of revenue through implementation of a technologically advanced work force scheduling system, and (iv) improving workplace safety to generate cost savings from reduced insurance claims.

Growth Strategies

A key element of our growth strategy focuses on expansion within existing service areas. We seek to maximize return on our investments in EMS operations by increasing utilization of ambulances through a balanced growth of both emergency and non-emergency medical transportation services. We evaluate new growth opportunities based on a number of criteria, including geographic proximity to existing regional operations, payer mix, medical transportation demands, competitive profiles, and demographic trends.

We will market our emergency ambulance services through the pursuit of new contracts and alliances with municipalities, other governmental entities, hospital-based emergency providers and fire districts. Based on our successful public/private alliance with the City of San Diego, our ambulance service contract in Aurora, Colorado, and contracts with numerous Arizona municipalities, we believe that contracting may provide a cost-effective approach to expansion into certain existing and new service areas. We believe that our strategic alliances can provide operating economies, coordination of the delivery of services, efficiencies in the use of personnel and equipment and enhanced levels of service while saving taxpayer dollars. We will continue to seek such mutually beneficial alliances and municipal contracts in existing and, to a limited extent, new service areas. Our non-emergency medical transportation marketing efforts are focused primarily on hospitals, health-care centers, nursing homes, rehabilitation centers and other related health-care entities.

Additionally, we strive to implement rate increases in order to meet escalating costs of delivering high-quality services. In locations where we experience a rise in levels of uncompensated care, we also seek subsidies to offset the cost of providing service to uninsured or economically disadvantaged patients. As a result of our efforts in fiscal year 2004, we achieved an 8.8% improvement in same-service area growth in the medical transportation and related service segment over fiscal year 2003 levels. We will continue to seek same-service-area growth opportunities in fiscal year 2005.

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Reducing Bad Debt Expense

We continued to develop and implement initiatives to enhance billing and collections results. In fiscal 2004, we worked to further streamline our overall ambulance billing processes and to improve related performance. Improvements in fiscal 2004 included programs designed to expedite the timely filing of ambulance claims and to create added controls over the day-to-day flow of aging claims. Additionally, significant attention was placed on improving the return on certain Medicare accounts that become difficult to collect. Ongoing programs target improvements to our field documentation procedures and pre-screening non-emergency medical transportation requests to ensure patients’ conditions meet medical necessity standards. We also placed a high priority on submitting ambulance claims electronically in order to expedite payment and maximize the efficiencies afforded by such systems.

Managing Payroll Costs Through Implementation of an Advanced Work Force Scheduling System

In an effort to minimize unnecessary overtime and eliminate duplicative scheduling among EMS and fire crews, we began the national phase-in of a new internet-based scheduling software designed to maximize efficiencies in this area. The software provides an electronic interface between our payroll system and scheduling specialists at each of our regional locations, allowing us to quickly and accurately track requests for vacation and sick time, for example, while producing schedules by shift, department or location. We believe the system will result in a reduction in labor costs.

Improving Work Place Safety to Generate Cost Savings from Reduced Insurance Claims

We have consistently placed workplace health and safety among our highest priorities, and that effort has been redoubled in recent years due, in part, to escalating insurance costs. We believe in creating a culture among our work force that encourages and demonstrates a committed approach to workplace health and safety. In fiscal 2004, we implemented a variety of safety initiatives that supported this commitment. New programs included enhanced facility audits, additional accident reporting guidelines, introduction of an employee/risk-management hotline, an enhanced patient care quality assurance program and an in-depth loss data report that can be utilized by regional managers to identify trends in their areas. We will continue to search out and implement innovative ways to reduce our insurance claims and improve the overall safety of our work environment in fiscal 2005.

ITEM 2. Properties

Facilities and Equipment

We lease our principal executive offices in Scottsdale, Arizona. Our current lease will expire in 2005. On June 3, 2004, we entered into a new lease for the relocation of our corporate headquarters, which will continue to be located in Scottsdale, Arizona. In those areas where we provide ambulance and fire services, we also lease facilities at which we base and maintain ambulances and fire apparatus. We also own 14 facilities within our service areas. Rent expense totaled $11.0 million, $10.7 million and $10.5 million in fiscal 2004, 2003 and 2002, respectively. At June 30, 2004, our fleet included approximately 1,278 owned and 53 leased ambulances and alternative transportation vehicles, 123 owned and 65 leased fire vehicles, and 265 owned and 29 leased other vehicles. We use a combination of in-house and outsourced maintenance services to maintain our fleet, depending on the size of the market and the availability of quality outside maintenance services.

ITEM 3. Legal Proceedings

From time to time, we are subject to litigation and regulatory investigations arising in the ordinary course of business. We believe that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on our business, financial condition, results of operations or cash flows. However, we are unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of our deductible or self-insured retention arising out of such claims. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation: Rural/Metro, Warren S. Rustand, the former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, the former Vice Chairman of the Board, and Robert E. Ramsey, Jr., its former Executive Vice President and former Director, were named as defendants in two purported class action lawsuits: HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V. RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. The two lawsuits, which contained virtually identical allegations, were brought on behalf of a class of persons who purchased our publicly traded securities including our common stock between April 24, 1997 and June 11, 1998. The complaints alleged that the defendants issued certain false and misleading statements regarding certain aspects of our financial status and that these statements allegedly caused our common stock to be traded at artificially inflated prices. The complaints also alleged that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated.

On April 17, 2003, Rural/Metro and the individual defendants agreed to settle the Haskell v. Rural/Metro and Ruble v. Rural/Metro cases with plaintiffs, subject to notice to the class and final court approval. Our primary and excess carriers funded the settlement on June 5, 2003 by depositing the funds in a designated escrow account and waived any claims for reimbursement of the funds subject to final court approval of the class action settlement. After a hearing on the final settlement agreement, the court entered an order approving the settlement and dismissing the Ruble case with prejudice on December 10, 2003. The Haskell case was dismissed with prejudice on January 13, 2004.

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

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

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

On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against us and our current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal from the court’s July 29, 2003 order to the Ninth Circuit. The appeal was dismissed as premature on October 27, 2003. The court dismissed the plaintiffs’ remaining claims against Arthur Andersen on January 27, 2004, and entered final judgment. On February 10, 2004, Rural/Metro and our current directors and officers filed a notion for attorneys’ fees. On February 26, 2004, the plaintiffs appealed the trial courts judgment to the Ninth Circuit. On March 9, 2004, the parties entered into a settlement agreement whereby the plaintiffs agreed to dismiss their appeal of the final judgment, and we agreed to withdraw all motions that were pending relating to the lawsuit.

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On March 5, 1999, we made a voluntary disclosure to the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) concerning questionable billing practices by a subsidiary operating in Pennsylvania. These practices evidently began prior to the January 1997 acquisition of that subsidiary by Rural/Metro and continued, to some extent, until December 1998. On October 25, 1999, a lawsuit styled THE UNITED STATES OF AMERICA ex rel. RICHARD S. BUCKMAN V. RURAL METRO CORPORATION AND DONLOCK, LTD., Civil Action No. 3:CV 99-1883, was filed under seal in United States District Court for the Middle District of Pennsylvania. The lawsuit alleged various improper billing practices under the Medicare program, including those practices we self-disclosed to the OIG several months earlier. On November 15, 2002, the government elected to intervene in one count concerning the issue we self-disclosed to the OIG and declined to intervene in the lawsuit’s remaining counts. The seal was lifted by court order on February 26, 2004. Accrued liabilities at June 30, 2004 and 2003, respectively include a $1.0 million and $0.8 million reserve for this matter. An unfavorable resolution of this lawsuit could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Legion Insurance Company and Reliance Insurance Company: With regard to certain issues relating to the liquidation of Legion Insurance Company (“Legion”) and Reliance Insurance Company (“Reliance”) that are being litigated before the Commonwealth Court of Pennsylvania, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.

Securities and Exchange Commission Inquiry: The Staff of the Securities and Exchange Commission is conducting an informal fact-finding inquiry that we believe is focused on a restatement of our financial statements for years prior to 2003. We are voluntarily providing information requested by the Staff and intend to cooperate fully with the Staff. We are unable to predict the impact of any related outcome.

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

On June 10, 2004, we held our annual meeting of stockholders. The matters before the meeting were:

1. The election of two directors to serve a three-year term or until their successors are elected; and

2. To authorize an amendment to our Certificate of Incorporation to increase the number of shares of common stock that we are authorized to issue from 23,000,000 to 40,000,000.

All nominees for director were elected and the proposal to increase the authorized shares of common stock was approved. The table below lists the votes cast for, against or withheld, as well as abstentions and broker non-votes.

(1) Election of Directors

	For	Withheld
Cor J. Clement, Sr.	18,987,687	1,503,105
Henry G. Walker	19,102,264	1,388,528

(2) Proposal to Increase Authorized Common Stock

For	Against	Abstain	Broker Non-Votes
19,472,550	1,012,937	5,305	—

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PART II

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

Our common stock traded on The Nasdaq SmallCap Market (“Nasdaq”) since August 4, 2000. Effective July 13, 2004, our common stock was quoted on the Over The Counter Bulletin Board (“OTCBB”). For further discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table sets forth the high and low sale prices of the common stock for the fiscal quarters indicated.

	High		Low
Year Ended June 30, 2004
First quarter	$	1.90	$	1.01
Second quarter	$	2.07	$	1.34
Third quarter	$	2.40	$	1.70
Fourth quarter	$	1.89	$	1.19
Year Ended June 30, 2003
First quarter	$	3.85	$	1.65
Second quarter	$	3.40	$	1.86
Third quarter	$	2.33	$	0.72
Fourth quarter	$	1.50	$	0.80

On September 15, 2004, the closing sale price of our common stock was $1.95 per share. On September 15, 2004, there were approximately 1,034 holders of record of our common stock.

Dividend Policy

We have never paid any cash dividends on our common stock. We currently plan to retain earnings, if any, for use in our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations and capital requirements as well as other factors deemed relevant by our Board of Directors. Our Senior Notes and the 2003 Amended Credit Facility contain restrictions on our ability to pay cash dividends, and any future borrowings may contain similar restrictions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

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ITEM 6. Selected Financial Data

The following selected financial data are derived from our historical consolidated financial statements. Our consolidated financial statements as of June 30, 2004, 2003, 2002, and 2001, and for each of the years then ended have been derived from our audited consolidated financial statements. Our consolidated financial statements as of and for the year ended June 30, 2000 are unaudited. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes appearing elsewhere in this Report (in thousands except per share amounts):

	Years Ended June 30,
Statement of Operations Data	2004			2003			2002			2001			2000
Net Revenue	$	526,603		$	484,639		$	453,151		$	440,970		$	458,890
Operating expenses:
Payroll and employee benefits		277,549			266,713			250,724			251,718			269,678
Provision for doubtful accounts		87,268			77,184			70,689			74,158			85,788
Depreciation and amortization		11,404			12,587			14,443			23,312			27,523
Other operating expenses		114,855			107,574			96,581			123,718			108,830
Asset impairment charges (1)		—			—			194			27,778			—
Contract termination costs and related asset impairment (1)		—			—			(107	)		9,256			—
Restructuring charge and other (1)		—			(1,421	)		(713	)		9,034			32,730
Operating income (loss)		35,527			22,002			21,340			(78,004	)		(65,659	)
Interest expense		(29,243	)		(28,012	)		(25,462	)		(30,624	)		(25,938	)
Interest income		97			197			644			642			596
Other income (expense), net		—			—			—			(4,053	)		—
Income (loss) from continuing operations before income taxes, minority interest, extraordinary loss and cumulative effect of change in accounting principle		6,381			(5,813	)		(3,478	)		(112,039	)		(91,001	)
Income tax (provision) benefit		(300	)		(118	)		2,531			(1,112	)		30,935
Minority interest		475			(1,507	)		(750	)		705			1,907
Income (loss) from continuing operations before extraordinary loss and cumulative effect of change in accounting principle		6,556			(7,438	)		(1,697	)		(112,446	)		(58,159	)
Income (loss) from discontinued operations (1) (2)		(345	)		16,404			3,046			(92,844	)		(2,337	)
Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		6,211			8,966			1,349			(205,290	)		(60,496	)
Extraordinary loss on expropriation of Canadian ambulance service licenses (3)		—			—			—			—			(1,200	)
Cumulative effect of change in accounting principle (4)		—			—			(49,513	)		—			(541	)
Net income (loss)		6,211			8,966			(48,164	)		(205,290	)		(62,237	)
Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method		(1,262	)		—			—			—			—
Less: Accretion of redeemable nonconvertible participating preferred stock		(6,320	)		(3,604	)		—			—			—
Add: Credit related to settlement of redeemable nonconvertible participating preferred stock with common stock		10,066			—			—			—			—
Net income (loss) applicable to common stock	$	8,695		$	5,362		$	(48,164	)	$	(205,290	)	$	(62,237	)

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	Years Ended June 30,
EPS Data	2004			2003			2002			2001			2000
Basic earnings per share (5):
Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting principle	$	0.54		$	(0.69	)	$	(0.11	)	$	(7.63	)	$	(3.99	)
Income (loss) from discontinued operations applicable to common stock (2)		(0.02	)		1.02			0.20			(6.30	)		(0.16	)
Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		0.52			0.33			0.09			(13.93	)		(4.15	)
Extraordinary loss on expropriation of Canadian ambulance service licenses (3)		—			—			—			—			(0.08	)
Cumulative effect of change in accounting principle (4)		—			—			(3.26	)		—			(0.04	)
Net income (loss)	$	0.52		$	0.33		$	(3.17	)	$	(13.93	)	$	(4.27	)
Diluted earnings per share (5):
Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting principle	$	0.30		$	(0.69	)	$	(0.11	)	$	(7.63	)	$	(3.99	)
Income (loss) from discontinued operations applicable to common stock (2)		(0.02	)		1.02			0.20			(6.30	)		(0.16	)
Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		0.28			0.33			0.09			(13.93	)		(4.15	)
Extraordinary loss on expropriation of Canadian ambulance service licenses (3)		—			—			—			—			(0.08	)
Cumulative effect of change in accounting principle (4)		—			—			(3.26	)		—			(0.04	)
Net income (loss)	$	0.28		$	0.33		$	(3.17	)	$	(13.93	)	$	(4.27	)
Weighted average number of common shares outstanding:
Basic		16,645			16,116			15,190			14,744			14,592
Diluted		21,817			16,116			15,190			14,744			14,592

	As of June 30,
Balance Sheet Data	2004			2003			2002			2001			2000
Total assets	$	205,241		$	196,166		$	200,708		$	264,006		$	435,414
Current portion of long-term debt (6)		1,495			1,329			1,633			294,439			299,104
Long-term debt, net of current portion (6)		304,057			305,310			298,529			1,286			2,850
Redeemable nonconvertible participating preferred stock (7)		—			7,793			—			—			—
Stockholders’ equity (deficit)		(192,226	)		(210,160	)		(205,752	)		(168,419	)		36,257

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	Years Ended June 30,
Cash Flow Data	2004			2003			2002			2001			2000
Cash flow provided by (used in) operating activities	$	14,501		$	13,146		$	9,634		$	6,710		$	(8,537	)
Cash flow used in investing activities		(8,421	)		(7,582	)		(5,832	)		(3,805	)		(13,640	)
Cash flow provided by (used in) financing activities		(2,269	)		(3,659	)		(3,170	)		(6,339	)		25,996

(1) During the year ended June 30, 2001, the Company recorded asset impairments, restructuring and other charges totaling $122.1 million, including $46.3 million relating to its Latin American operations which were disposed of in September 2002 and $15.7 million relating to operations that have been classified as discontinued operations for financial reporting purposes. During the year ended June 30, 2000, the Company recorded restructuring charges totaling $32.9 million relating to its decision to exit certain underperforming service areas, of which $1.3 million has been classified as discontinued operations for financial reporting purposes.

(2) During fiscal 2004 we ceased operating in 10 medical transportation service areas as a result of these service areas not meeting internal operational and profitability measures. We also ceased operating in three fire and other service areas, one of which was due to the customer filing Chapter 11, one of which was sold as we continue to dispose of non-core businesses and one of which was due to the city converting the service area to a fire district. The results of these service areas are included in income (loss) from discontinued operations. Effective September 27, 2002, the Company sold its Latin American operations to local management in exchange for the assumption of such operations’ net liabilities. The gain on the disposition totaled $12.5 million. For financial reporting purposes, the results of the aforementioned discontinued service areas and the Company’s former Latin American operations have been included in income (loss) from discontinued operations. See Note 4, Discontinued Operations, in our consolidated financial statements.

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

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

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

(5) As described in Note 2 to our consolidated financial statements, we restated our earnings per share amounts for the fiscal year ended June 30, 2003 as well as for certain interim periods in fiscal 2003 as a result of the issuance of Emerging Issues Task Force (“EITF”) No. 03-6, “Participating Securities and the Two Class Method under FASB Statement No. 128, Earnings per Share” (“EITF 03-6”) in March 2004 which clarified the use of the “two-class” method. As a result of this guidance, our basic and diluted earnings per share amounts for fiscal 2003 were increased by $0.05 per share from the amounts previously reported.

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(6) Our current liabilities exceeded our current assets at June 30, 2001 and 2000 as a result of the classification of amounts outstanding under our revolving credit facility and our 7 ⁷/8% Senior Notes due 2008 (Senior Notes) as current liabilities. Such classification resulted from the fact that we were not in compliance with certain of the covenants contained in our revolving credit agreement and because of the related provisions contained in the agreement relating to our Senior Notes. Amounts outstanding under our revolving credit facility and our Senior Notes were classified as long-term liabilities as of June 30, 2004, 2003 and 2002 as a result of amendments to our credit facility the most recent of which became effective September 30, 2003. Such amendments waived previous covenant violations and extended the maturity date of the credit facility from March 16, 2003 to December 31, 2006. See Note 11, Long-Term Debt, in our consolidated financial statements.

(7) On June 30, 2004, the Company settled the Series B redeemable nonconvertible participating preferred stock (the “Series B Shares”) by the issuance of 2,115,490 common shares.

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

This discussion and analysis should be read in conjunction with our Selected Financial Data and our consolidated financial statements and notes appearing elsewhere herein.

Introduction

Business Structure

Rural/Metro Corporation is a leading national provider of medical transportation and related services. We provide ambulance services in response to emergency medical calls (emergency ambulance services) and non-emergency transport services (general transport services) to municipal, residential, commercial and industrial customers. These services are provided under contracts with governmental entities, hospitals, health care facilities and other health care organizations. We primarily derive our revenue under these contracts through reimbursements from private insurance programs and government programs such as Medicare and Medicaid and reimbursement from a variety of governmental entities, as well as through fees paid directly by the patients utilizing our services.

We also provide fire protection services and other safety and health care related services, including dispatch, fleet services and home health services. These services are provided on a subscription fee basis to individual homeowners or commercial property owners and under contracts with municipalities, fire districts or other agencies.

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

Managements’ Objectives

The results of fiscal 2004 reflect our continued focus on growing and strengthening our base of core operations throughout the country. We placed particular emphasis during the year on expanding service areas that we have identified for future long-term growth, sought targeted new-contract opportunities and continued to implement new programs that concentrate on added operating efficiencies.

In order to improve cash flow from operations to enable us to service our long-term debt, remain in compliance with various restrictions and covenants in our debt agreements and to fund working capital, capital expenditures and business development efforts, we will continue to target a variety of areas for growth and improvement, including:

• Organic Growth:

We have targeted select, new 911 ambulance contracts in regions with acceptable payer mixes and forecasted population growth. Positive growth continues in existing local and regional service areas, including our focus on new contracts, general rate increases and overall efforts to maximize operational efficiencies. Contract activities during fiscal 2004 included the award of long-term, exclusive medical transportation renewal contracts in a variety of communities and health care systems throughout the nation, as well as a renewal for ARFF services at a municipal airport.

• Billing and Collections:

We have implemented new initiatives to enhance our cash flow performance and streamline the ambulance billing process, including the use of software designed to create added controls over the day-to-day flow of claims, creating systems to improve the return on difficult-to-collect accounts and placing a higher priority on submitting ambulance claims electronically in order to expedite payment and maximize the efficiencies

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afforded by such systems. We have also initiated a pilot study of handheld portable devices that will eventually be carried on board our ambulances and emergency vehicles. The devices are designed to enhance the speed, accuracy and effectiveness of patient information collected in the field. Another important component of our strategic plan focuses on reducing bad debt expense through billing-oriented initiatives. Our team of internal billing and collections specialists focused on several initiatives during 2004, including maximizing electronic submissions, providing web-based payment alternatives and expanding collection data sources.

• Operational Efficiencies:

We continue to emphasize the importance of creating operations and administrative efficiencies that will result in cost savings and improved margins. One area of focus relates to improving the efficiency of work force scheduling in order to minimize unscheduled overtime among our EMS and fire personnel, who represent the majority of our work force. In fiscal 2004, we began implementing a customized software program that more fully automates the work scheduling process. Another area of focus is workplace health and safety. In fiscal 2004, our efforts included the introduction of facility audits, new EMS based driver development programs and enhanced driver safety criteria.

In evaluating our business, we further monitor a number of key operating and financial statistics, including average patient charge, average daily deposits, days sales outstanding and transport volume, among others. The results and trends indicated by these statistics provide us with important data that we use to analyze our performance and guide the business going forward.

Because a percentage of our medical transportation revenue is paid through the Medicare system, we note that Congressional passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 included an increase in reimbursement for ambulance services provided to Medicare patients. Among other relief, the Act provided for a 1% increase in reimbursement for urban transports and a 2 % increase for rural transports, which took effect July 2004 and will remain in place for the balance of the phase-in of the national ambulance fee schedule. This phase-in period will be complete in December 2010. Although we expect this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will ultimately benefit the portion of Rural/Metro’s medical transportation revenue that is paid by Medicare, we are currently unable to determine the ultimate impact.

Critical Accounting Estimates and Judgments

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of our financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, general liability and workers’ compensation claim reserves. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following accounting policies as critical to our business operations and the understanding of our results of operations. The discussion below is not intended to represent a comprehensive list of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 – “The Company and its Significant Accounting Policies”, to our consolidated financial statements, which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.

Medical Transportation and Revenue Recognition

Ambulance and alternative transportation service fees are recognized when services are provided and are recorded net of discounts applicable to Medicare, Medicaid and other third-party payers. Because of the length of the collection cycle with respect to ambulance and alternative transportation service fees, it is necessary to estimate the amount of

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these discounts at the time revenue is recognized. The collectibility of ambulance and alternative transportation service fees is analyzed using historical collection experience within each service area. Using collection data resident in our billing system, we estimate the percentage of gross ambulance and alternative transportation service fees that will not be collected and record a provision for discounts and doubtful accounts. The portion of the provision allocated to discounts applicable to Medicare, Medicaid and other third-party payers is based on historical write-offs relating to such discounts as a percentage of the related gross revenue recognized for each service area. The ratio is then applied to current period gross ambulance and alternative transportation service fees to determine the portion of the provision that will be recorded as a reduction in revenue. The remaining amount of the provision is classified as provision for doubtful accounts. If the historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, revenue could be overstated or understated. Discounts applicable to Medicare, Medicaid and other third-party payers related to continuing operations, which are reflected as a reduction of medical transportation revenue, totaled $180.0 million, $147.9 million and $131.9 million for the years ended June 30, 2004, 2003 and 2002, respectively.

As discussed above, the provisions for Medicare, Medicaid and other third-party payer discounts as a percentage of gross ambulance and alternative transportation service fees are as follows:

	Years Ended June 30,
	2004		2003		2002
Medicare	14.7	%	12.3	%	11.3	%
Medicaid	8.7	%	8.2	%	8.2	%
Other third-party	6.8	%	7.8	%	7.8	%
Total discounts	30.2	%	28.3	%	27.3	%

The increase in discounts as a percentage of gross revenue is a result of rate increases, some of which we are unable to pass on to Medicare and Medicaid. Based on the allocation of provisions between discounts and doubtful accounts an increase/decrease of 1% in our estimated collection percentage would have resulted in an increase/decrease in net revenue of $4.0 million, $3.4 million and $3.2 million for the years ended June 30, 2004, 2003 and 2002, respectively.

Provision for Doubtful Accounts for Medical Transportation Revenue

Ambulance and alternative transportation service fees are billed to various payer sources. As discussed above, discounts applicable to Medicare, Medicaid and other third-party payers are recorded as reductions of gross revenue. We also estimate provisions related to the potential uncollectibility of amounts billed to other payers based on historical collection data and historical write-off activity within each service area. The provision for doubtful accounts percentage that is applied to gross ambulance and alternative transportation service fee revenue is calculated as the difference between the total expected collection percentage less percentages applied for discounts applicable to Medicare, Medicaid and other third-party payers described above. If historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, the provision for doubtful accounts may be overstated or understated. The provision for doubtful accounts on ambulance and alternative transportation service revenue from continuing operations totaled $87.3 million, $77.2 million and $70.7 million for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.

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As discussed above, the provision for doubtful accounts as a percentage of gross ambulance and alternative transportation service fees is as follows:

	Years Ended June 30,
	2004		2003		2002
Doubtful accounts	14.6	%	14.8	%	14.6	%

Based on the allocation of provisions between discounts and doubtful accounts, an increase/decrease of 1% in our estimated collections percentage would have resulted in an increase/decrease in the provision for doubtful accounts of $2.0 million, $1.8 million and $1.7 million for the years ended June 30, 2004, 2003 and 2002, respectively.

Workers’ Compensation Reserves

Beginning May 1, 2002, we began purchasing corporate-wide workers’ compensation insurance policies, for which we pay premiums that can be increased or decreased at certain intervals based upon a retrospective review of incurred losses. Under such policies, we have no obligation to pay any deductible amounts on claims occurring during the policy period. Accordingly, provisions for workers’ compensation expense for claims arising on and after May 1, 2002 are reflective of premium costs only. Each of these annual policies covers all workers’ compensation claims made by employees of all of our domestic subsidiaries. A premium payroll audit of the policy year that began May 1, 2002 resulted in a refund of premiums of approximately $1.2 million. We do not currently expect any adverse findings on any subsequent policy year reviews.

Prior to May 1, 2002, our workers’ compensation policies included a deductible obligation with no aggregate limit. Claim provisions were estimated based on historical claims data and the ultimate projected value of those claims. For claims occurring prior to May 1, 2002, our third-party administrator established initial estimates at the time a claim was reported and periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the determination of our workers’ compensation claims reserves. If the ultimate development of these claims is significantly different than has been estimated, the related reserves for workers’ compensation claims could be overstated or understated. Reserves related to workers’ compensation claims totaled $8.1 million and $11.3 million at June 30, 2004 and 2003, respectively.

General Liability Reserves

We are subject to litigation arising in the ordinary course of our business. In order to minimize the risk of our exposure, we maintain certain levels of coverage for comprehensive general liability, automobile liability, and professional liability. These policies currently are, and historically have been, underwritten on a deductible basis. Provisions are made to record the cost of premiums as well as that portion of the claims that is our responsibility. Our third-party administrator establishes initial estimates at the time a claim is reported and periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the determination of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $15.7 million and $13.9 million at June 30, 2004 and 2003, respectively.

Asset Impairment

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

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Our goodwill balances are reviewed for impairment annually (and interim periods if events or changes in circumstances indicate that the related asset may be impaired) using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We perform our annual impairment test on June 30.

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Results of Operations

Year Ended June 30, 2004 Compared To Year Ended June 30, 2003

Overview

The following table sets forth a comparison of certain items from our statements of operations for the years ended June 30, 2004 and 2003. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item (in thousands):

	Years Ended June 30,
	2004			% of Net Revenue		2003			% of Net Revenue		$ Change			% Change
Net revenue	$	526,603		100.0	%	$	484,639		100.0	%	$	41,964		8.7	%
Operating expenses:
Payroll and employee benefits		277,549		52.7	%		266,713		55.0	%		10,836		4.1	%
Provision for doubtful accounts		87,268		16.6	%		77,184		15.9	%		10,084		13.1	%
Depreciation and amortization		11,404		2.2	%		12,587		2.6	%		(1,183	)	-9.4	%
Other operating expenses		114,855		21.8	%		107,574		22.2	%		7,281		6.8	%
Restructuring charge and other		—		—			(1,421	)	-0.3	%		1,421		100.0	%
Total operating expenses		491,076		93.3	%		462,637		95.5	%		28,439		6.1	%
Operating income		35,527		6.7	%		22,002		4.5	%		13,525		61.5	%
Interest expense		(29,243	)	-5.6	%		(28,012	)	-5.8	%		(1,231	)	4.4	%
Interest income		97		0.0	%		197		0.0	%		(100	)	-50.8	%
Income (loss) from continuing operations before income taxes and minority interests		6,381		1.2	%		(5,813	)	-1.2	%		12,194		209.8	%
Income tax provision		(300	)	-0.1	%		(118	)	0.0	%		(182	)	154.2	%
Minority interest		475		0.1	%		(1,507	)	-0.3	%		1,982		131.5	%
Income (loss) from continuing operations		6,556		1.2	%		(7,438	)	-1.5	%		13,994		188.1	%
Income (loss) from discontinued operations		(345	)	-0.1	%		16,404		3.4	%		(16,749	)	-102.1	%
Net income	$	6,211		1.2	%	$	8,966		1.9	%	$	(2,755	)	-30.7	%

We generated net revenue of $526.6 million for the year ended June 30, 2004 compared to $484.6 million for the year ended June 30, 2003. Of the $42.0 million increase in net revenue, approximately $18.1 million is due to an increase in transports, and approximately $23.1 million is due to an increase in rates.

Total operating expenses increased $28.4 million for the year ended June 30, 2004 compared to the same period in 2003. However, as a percentage of net revenue, operating expenses were 220 basis points lower for the year ended June 30, 2004 compared to the same period in 2003. The decrease is primarily a result of a decrease of 230 basis points in payroll and employee benefits as a percentage of net revenue for the year ended June 30, 2004 compared to the same period in 2003 as a result of an increase in operational efficiencies, which resulted in less overtime and regular pay to service the increase in net revenue.

For the year ended June 30, 2004, our income from continuing operations was $6.6 million, or $0.30 per diluted share, compared to a loss from continuing operations of $7.4 million, or $0.69 per diluted share for the year ended June 30, 2003. These results reflect the increase in interest expense of $1.4 million primarily related to increased interest rates resulting from the renegotiation of our credit facility in fiscal 2003 and increased amortization of deferred financing costs related to the renegotiation as well as the additional items and factors discussed below.

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Net Revenue

A comparison of net revenue by segment is included in the table below (in thousands):

	Years Ended June 30,				$ Change		% Change
	2004		2003
Medical transportation and related services	$	452,254	$	411,399	$	40,855	9.9	%
Fire and other		74,349		73,240		1,109	1.5	%
Total net revenue	$	526,603	$	484,639	$	41,964	8.7	%

Medical Transportation and Related Services — Medical transportation and related service revenue increased $40.9 million, or 9.9%, from $411.4 million for the year ended June 30, 2003 to $452.3 million for the year ended June 30, 2004. This increase is primarily comprised of a $36.1 million increase in same service area revenue attributable to an increase in transports and an increase in rates. Additionally, there was a $5.8 million increase in revenue related to new contracts offset by a $1.1 million decrease related to service areas that were closed in fiscal 2003.

A comparison of transports is included in table below:

	Years Ended June 30,		Transport Change	% Change
	2004	2003
Ambulance transports	1,105,912	1,053,074	52,838	5.0	%
Alternative transportation transports	99,351	97,388	1,963	2.0	%
Total transports from continuing operations	1,205,263	1,150,462	54,801	4.8	%

Transports in areas that we served in both fiscal 2004 and 2003 increased by approximately 42,200 transports. The increase in transports is a result of an overall aging population, increase in population density where we have significant operations and increased patient travel between specialized treatment health care facilities. Additionally, there was an increase of approximately 14,300 transports related to new contracts as well as a decrease of approximately 1,700 transports in a service area closed in fiscal 2003. The net/net average patient charge, or “net/net APC” (defined as gross EMS transport revenue minus provisions for contractual allowances and doubtful accounts), for ambulance transports made in fiscal 2004 was $310 compared to $293 for fiscal 2003. The increase in net/net APC for ambulance transports is primarily a result of rate escalators and other general rate increases that are contained or allowed in contracts to provide EMS services, the discontinuation of lower rate contracts and an increase in overall operating efficiencies associated with billing initiatives.

Fire and Other — Fire and other revenue increased $1.1 million, or 1.5%, from $73.2 million for the year ended June 30, 2003 to $74.3 million for the year ended June 30, 2004. The increase is primarily due to an increase in fire subscription revenue of $3.1 million, or 9.6%, as a result of an increase in rates. Forestry and fire fee revenue totaled $3.0 million for the year ended June 30, 2003 as compared to $1.6 million for the year ended June 30, 2004, with the decrease primarily related to the particularly active wildfire season in fiscal 2003 compared to fiscal 2004.

Operating Expenses

Payroll and Employee Benefits — The increase in payroll and employee benefits is primarily related to an increase in transports, which in turn resulted in an increase in regular, overtime and fill-in wages of $9.2 million. In addition, we received a worker’s compensation premium refund of approximately $1.2 million during the year ended June 30, 2003. Payroll and employee benefits’ as a percentage of net revenue was 52.7% and 55.0% for the years ended June 30, 2004 and 2003, respectively, with the decrease resulting primarily from operational efficiencies, which have yielded less overtime and regular pay to service the increase in net revenue.

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Provision for Doubtful Accounts — The increase in the provision for doubtful accounts is related to the increase in medical transportation and related service revenue. The provision for doubtful accounts as a percentage of gross ambulance and alternative transportation service fees was 14.6% and 14.8% for the years ended June 30, 2004 and 2003, respectively. This percentage has remained consistent as the mix in the relationship between Medicare, Medicaid and other third party payer discounts and doubtful accounts has remained stable year over year.

A summary of activity in our allowance for doubtful accounts during the fiscal years ended June 30, 2004 and 2003 is as follows (in thousands):

	As of June 30,
	2004			2003
Balance at beginning of year	$	48,422		$	37,966
Provision for doubful accounts - continuing operations		87,268			77,184
Provision for doubful accounts - discontinued operations		4,209			7,862
Write-offs of uncollectible accounts		(80,469	)		(74,590	)
Balance at end of year	$	59,430		$	48,422

Depreciation and Amortization — The decrease in depreciation and amortization is primarily due to reduced capital expenditures in recent years as well as certain assets becoming fully depreciated.

Other Operating Expenses — Other operating expenses increased $7.3 million or 6.8%, from $107.6 million to $114.9 million and consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel and professional fees. The increase in other operating expenses is primarily due to increases in general liability insurance expenses of $3.6 million due to increased premium rates in the new policy year, an increase in vehicle related expenses of $1.5 million due to an aging fleet of ambulances and an increase in fuel costs, as well as general increases in other operating expense categories.

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

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

	Severance Costs			Lease Termination Costs			Other Exit Costs			Total
Balance at July 1, 2002	$	757		$	1,514		$	32		$	2,303
Fiscal 2003 usage		(29	)		(207	)		(71	)		(307	)
Adjustments		(728	)		(732	)		39			(1,421	)
Balance at June 30, 2003		—			575			—			575
Fiscal 2004 usage		—			(212	)		—			(212	)
Balance at June 30, 2004	$	—		$	363		$	—		$	363

The restructuring reserve as of June 30, 2004 relates to lease termination costs for which payments will be made through December 2006.

Interest Expense — The balance on our credit facility was $152.6 million at June 30, 2004 as compared to $152.4 million at June 30, 2003. The average rate charged on the credit facility, including additional amounts accrued due to noncompliance with covenants, was 8.92% for the year ended June 30, 2004 compared to 8.25% for the year ended June 30, 2003. The change in interest rate accounts for an increase of approximately $1.0 million in interest expense. Amortization of deferred financing costs totaled $2.8 million for the year ended June 30, 2004 as compared to $2.0 million for the year ended June 30, 2003. Amortization of deferred financing costs in the year ended June 30, 2004 includes amortization of costs incurred relating to the 2002 Amended Credit Facility, the 2003 Second Amended and Restated Credit Facility and the Senior Notes. Additionally, upon negotiation of the 2003 Second Amended and Restated Credit Facility, the amortization period of the costs associated with the 2002 Amended Credit Facility was extended through December 31, 2006. See further discussion of the 2003 Second Amended and Restated Credit Facility in “Liquidity and Capital Resources.”

Minority Interest — The decrease in minority interest is a result of the net loss at our joint venture for the year ended June 30, 2004 as compared to net income generated for the year ended June 30, 2003. The loss in current year is primarily a result of an increase in general, auto and professional insurance expense of approximately $0.6 million and an increase in payroll and payroll related costs of approximately $1.3 million.

Income (Loss) From Discontinued Operations — During fiscal 2004 we ceased operating in 10 medical transportation service areas as a result of these service areas not meeting internal operational and profitability measures. We also ceased operating in three fire and other service areas, one of which was due to the customer filing Chapter 11, one of which was sold as we continue to dispose of non-core businesses and one of which was due to the city converting the service area to a fire district. The results of these service areas for the years ended June 30, 2004 and 2003 are included in income (loss) from discontinued operations. Net revenue for discontinued medical transportation and related service areas totaled approximately $13.1 million and $30.4 million for the years ended June 30, 2004 and 2003, respectively. These service areas generated a loss of approximately $1.1 million in the year ended June 30, 2004 and net income of approximately $3.1 million in the year ended June 30, 2003.

Net revenue for discontinued fire and other service areas totaled approximately $3.4 million and $5.1 million for the years ended June 30, 2004 and 2003, respectively. These service areas generated net income of approximately $0.6 million and $0.7 million in the years ended June 30, 2004 and 2003, respectively.

On June 18, 2004, we entered into an agreement to sell one of our fire and other service areas, which is included in discontinued operations as of June 30, 2004. Net revenue totaled approximately $0.3 million for both years ended June 30, 2004 and 2003. This service area generated net income of approximately $0.2 million for both years ended June 30, 2004 and 2003.

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

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Medical transportation and related service revenue relating to our Latin American operations totaled $2.1 million for the year ended June 30, 2003. Fire and other revenue for these operations totaled $0.3 million for the year ended June 30, 2003. Our Latin American operations generated a loss of $0.2 million for the year ended June 30, 2003.

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

Overview

The following table sets forth a comparison of certain items from our statements of operations for the years ended June 30, 2003 and 2002. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item (in thousands):

	Years Ended June 30,
	2003			% of Net Revenue		2002			% of Net Revenue		$ Change			% Change
Net revenue	$	484,639		100.0	%	$	453,151		100.0	%	$	31,488		6.9	%
Operating expenses:
Payroll and employee benefits		266,713		55.0	%		250,724		55.3	%		15,989		6.4	%
Provision for doubtful accounts		77,184		15.9	%		70,689		15.6	%		6,495		9.2	%
Depreciation and amortization		12,587		2.6	%		14,443		3.2	%		(1,856	)	-12.9	%
Other operating expenses		107,574		22.2	%		96,581		21.3	%		10,993		11.4	%
Restructuring charge and other		(1,421	)	-0.3	%		(626	)	-0.1	%		(795	)	127.0	%
Total expenses		462,637		95.5	%		431,811		95.3	%		30,826		7.1	%
Operating income		22,002		4.5	%		21,340		4.7	%		662		3.1	%
Interest expense		(28,012	)	-5.8	%		(25,462	)	-5.6	%		(2,550	)	10.0	%
Interest income		197		0.0	%		644		0.1	%		(447	)	-69.4	%
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle		(5,813	)	-1.2	%		(3,478	)	-0.8	%		(2,335	)	67.1	%
Income tax (provision) benefit		(118	)	0.0	%		2,531		0.6	%		(2,649	)	-104.7	%
Minority interest		(1,507	)	-0.3	%		(750	)	-0.1	%		(757	)	100.9	%
Loss from continuing operations before cumulative effect of change in accounting principle		(7,438	)	-1.5	%		(1,697	)	-0.4	%		(5,741	)	338.3	%
Income from discontinued operations		16,404		3.4	%		3,046		0.7	%		13,358		438.5	%
Income before cumulative effect of change in accounting principle		8,966		1.9	%		1,349		0.3	%		7,617		564.6	%
Cumulative effect of change in accounting principle		—		—			(49,513	)	-11.0	%		49,513		-100.0	%
Net income (loss)	$	8,966		1.9	%	$	(48,164	)	-10.6	%	$	57,130		-118.6	%

We generated net revenue of $484.6 million for the year ended June 30, 2003 compared to $453.2 million for the year ended June 30, 2002. The overall increase in revenue of $31.4 million for fiscal 2003 compared to fiscal 2002 was offset by an increase in total operating expenses of $31.0 million for fiscal 2003 compared to fiscal 2002. Of the $31.0 million increase in net revenue, approximately $4.5 million is due to an increase in transports, and approximately $21.9 million is due to an increase in rates. The increase in operating expenses was primarily a result of an increase in payroll expenditures of $15.9 million due to general wage increases and overtime costs, increased other operating costs of $11.0 million primarily resulting from increased general insurance costs due to increased claims and premium rates, and an increase in provision for doubtful accounts of $6.5 million as a result of the increase in medical transportation and related service revenue.

For the year ended June 30, 2003, our loss from continuing operations before cumulative effect of change in accounting principal was $7.4 million, or $0.69 per diluted share, compared to a loss from continuing operations of $1.7 million or $0.11 per diluted share for the year ended June 30, 2002. These results reflect the increase in interest expense of $2.6 million primarily related to increased interest rates resulting from the renegotiation of our credit facility in fiscal 2003 and increased amortization of deferred financing costs related to the renegotiation, as well as the additional items and factors discussed below.

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In addition, we recorded an income tax benefit of $2.5 million in fiscal 2002 compared to an income tax expense of $0.2 million in fiscal 2003. The benefit recorded in fiscal 2002 was a result of federal income tax refunds of $0.6 million resulting from legislation enacted in 2002 that allowed us to carry back a portion of our net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition was deferred until receipt.

Net Revenue

A comparison of net revenue by segment is included in the table below (in thousands):

	Years Ended June 30,				$ Change		% Change
	2003		2002
Medical transportation and related services	$	411,399	$	385,995	$	25,404	6.6	%
Fire and other		73,240		67,156		6,084	9.1	%
Total net revenue	$	484,639	$	453,151	$	31,488	6.9	%

Medical Transportation and Related Services — The increase in medical transportation and related services is primarily comprised of a $28.3 million increase in same service area revenue attributable to overall rate increases, enhanced call screening procedures and other factors. Additionally, there was a $3.3 million increase in revenue related to two new 911 contracts that began during fiscal 2003 offset by a $2.0 million decrease related to the loss of the 911 contract in Arlington, Texas and a $4.2 million decrease related to service areas that were closed in fiscal 2002.

A comparison of transports is included in the table below:

	Years Ended June 30,		Transport Change		% Change
	2003	2002
Ambulance transports	1,053,074	1,037,103	15,971		1.5	%
Alternative transportation transports	97,388	142,610	(45,222	)	-31.7	%
Total transports from continuing operations	1,150,462	1,179,713	(29,251	)	-2.5	%

Transports in areas that we served in both fiscal 2003 and 2002 decreased by approximately 18,000 transports. Additionally, there was an increase of 6,000 transports related to two 911 contracts that began during fiscal 2003 offset by a 4,000 transport decrease related to the loss of the 911 contract in Arlington and a 13,000 transport decrease related to service areas which were closed in fiscal 2002. The net/net APC for ambulance transports made in fiscal 2003 was $293 compared to $277 for fiscal 2002. The increase in net/net APC for ambulance transports is primarily a result of rate escalators and other general rate increases that are contained or allowed in contracts to provide EMS services, the discontinuance of lower rate contracts and an increase in overall operating efficiencies associated with payroll and billing initiatives.

Fire and Other — Fire protection services revenue increased primarily due to rate and utilization increases in our subscription fire programs of $2.6 million, rate increases on existing and additional fire contracts of $1.5 million and a $0.7 million increase in wild land fire services revenue. We experienced a particularly active wildfire season in the fiscal year ended June 30, 2003. Additionally there was an increase of $1.3 million in other revenue relating to revenues from dispatch, fleet, billing, training and home health care services.

Operating Expenses

Payroll and Employee Benefits — The increase in payroll and employee benefit expenses is primarily related to an increase in regular, overtime and fill-in wages of $6.2 million, an increase in vacation expense of $2.0 million, an increase in 401(k) expense of $1.5 million as a result of the company not contributing to the 401(k) plan in fiscal 2002 and increased health insurance costs of $2.5 million primarily due to increased health insurance claims, partially offset by a worker’s compensation premium refund of approximately $1.2 million received during 2003.

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Provision for Doubtful Accounts — The increase in the provision for doubtful accounts is primarily related to the increase in medical transportation and related service revenue. The provision for doubtful accounts as a percentage of gross ambulance and alternative transportation service fees was 14.8% and 14.6% for the years ended June 30, 2003 and 2002, respectively. This percentage has remained consistent as the mix in the relationship between Medicare, Medicaid and other third party payer discounts and doubtful accounts has remained stable year over year.

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

	As of June 30,
	2003			2002
Balance at beginning of year	$	37,966		$	60,812
Provision for doubful accounts - continuing operations		77,184			70,689
Provision for doubful accounts - discontinued operations		7,862			7,191
Write-offs of uncollectible accounts		(74,590	)		(100,726	)
Balance at end of year	$	48,422		$	37,966

Depreciationand Amortization — The decrease in depreciation and amortization is primarily due to reduced capital spending in recent years as well as certain assets becoming fully depreciated.

Other Operating Expenses — Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel and professional fees. The increase in other operating expenses is primarily due to increases in general liability insurance expenses of $5.1 million due to increased premium rates, professional fees of $1.3 million related to the amendment of our credit facility on September 30, 2002 and general increases in other operating expense categories.

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

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

	Severance Costs			L ease Termination Costs			Other Exit Costs			Total
Balance at July 1, 2001	$	1,834		$	3,234		$	1,101		$	6,169
Fiscal 2002 usage		(1,025	)		(1,172	)		(951	)		(3,148	)
Adjustments		(52	)		(548	)		(118	)		(718	)
Balance at June 30, 2002		757			1,514			32			2,303
Fiscal 2003 usage		(29	)		(207	)		(71	)		(307	)
Adjustments		(728	)		(732	)		39			(1,421	)
Balance at June 30, 2003	$	—		$	575		$	—		$	575

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

Interest Expense — The increase in interest expense was primarily due to increased interest rates resulting from the renegotiation of our credit facility in September 2002. Amortization of deferred financing costs totaled $2.0 million for the year ended June 30, 2003 compared to $0.7 million for the year ended June 30, 2002. See further discussion of the 2002 Amended Credit Facility in “Liquidity and Capital Resources.”

Interest Income — The decrease in interest income relates to $0.5 million of income received in conjunction with an income tax refund that was included in the results for the year ended June 30, 2002.

Income Taxes — The income tax benefit in 2002 resulted from federal income tax refunds of $0.6 million resulting from legislation that allowed us to carry back a portion of our net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition had been deferred until receipt. We did not recognize the future income tax benefits attributable to our domestic net operating losses in either 2003 or 2002 as it is more likely than not that the related benefits will not be realized.

Income From Discontinued Operations — During fiscal 2004, we ceased operating in 10 medical transportation service areas as a result of these service areas not meeting internal operational and profitability measures. We also ceased operating in three fire and other service areas, one of which was due to the customer filing Chapter 11, one of which was sold as we continue to dispose of non-core businesses and one of which was due to the city converting the service area to a fire district. The results of these service areas for the years ended June 30, 2003 and 2002 are included in income from discontinued operations. Net revenue for discontinued medical transportation and related service areas totaled approximately $30.4 million and $30.7 million for the years ended June 30, 2003 and 2002, respectively. These service areas generated income of approximately $3.1 million and $0.9 million for the years ended June 30, 2003 and 2002, respectively.

Net revenue for discontinued fire and other service areas totaled approximately $5.1 million and $4.8 million for the years ended June 30, 2003 and 2002, respectively. These service areas generated net income of approximately $0.7 for each of the years ended June 30, 2003 and 2002.

On June 18, 2004, we entered into an agreement to sell one of our fire and other service areas which is included in discontinued operations as of June 30, 2004. Net revenue totaled approximately $0.4 million for each of the years ended June 30, 2003 and 2002. This service area generated net income of approximately $0.2 for each of the years ended June 30, 2003 and 2002.

Due to deteriorating economic conditions and the continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net liabilities. The gain on the disposition of our Latin American operations totaled $12.5 million and is included in income from discontinued operations for the year ended June 30, 2003. Medical transportation and related service revenue related to our Latin American operations totaled $2.1 million and $23.9 million for the years ended June 30, 2003 and 2002, respectively. Fire and Other revenue related to our Latin American operations totaled $0.3 million and $1.5 million for the years ended June 30, 2003 and 2002, respectively. Our Latin American operations generated a net loss of $0.2 million through September 27, 2002 and net income of $1.0 million for the year ended June 30, 2002.

Cumulative Effect of Change in Accounting Principle — We adopted the new rules on accounting for goodwill and other intangible assets effective July 1, 2001. Under the transitional provisions of SFAS 142, we performed impairment tests on the net goodwill and other intangible assets associated with each of our reporting units with the assistance of independent valuation experts and determined that a transitional goodwill impairment charge of $49.5 million, both before and after tax, was required. The impairment charge primarily related to our domestic medical transportation and related services segment.

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Liquidity and Capital Resources

Our primary source of liquidity is our cash flow from operations as well as existing cash balances. At June 30, 2004, we had cash of $16.4 million. Our liquidity needs are primarily to service our long-term debt and fund our working capital requirements, capital expenditures and business development activities. Our ability to generate cash from operating activities is subject to, among other things, our future operating performance as well as general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

We do not believe that cash flow from operations will be sufficient to satisfy the principal payment required on the 2003 Amended Credit Facility that will be due on December 31, 2006. Consequently, we will seek to refinance the credit facility with cash obtained through additional borrowings or the issuance of additional equity. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.

In order to improve cash flow from operations, we plan to target a variety of areas for growth and cash flow improvement, including:

• Organic Growth:

We have targeted select new 911 ambulance contracts in regions with aging populations and forecasted population growth. Positive growth continues in existing local and regional service areas, including our focus on contract renewals, general rate increases and overall efforts to maximize operational efficiencies.

• Billing and Collections:

We have implemented new initiatives to enhance our cash flow performance and streamline the ambulance billing process, including the use of software designed to create added controls over the day-to-day flow of claims, creating systems to improve the return on difficult-to-collect accounts and placing a higher priority on submitting ambulance claims electronically in order to expedite payment and maximize the efficiencies afforded by such systems.

• Operational Efficiencies:

We continue to emphasize the importance of creating operations and administrative efficiencies that will result in cost savings and improved margins. One area of focus relates to improving the efficiency of work force scheduling in order to minimize unscheduled overtime among our EMS and fire personnel, who represent the majority of our work force. In fiscal 2004, we began implementing a customized software program that more fully automates the work scheduling process. Another area of focus is workplace health and safety. In fiscal 2004, our efforts included the introduction of facility audits, new EMS based driver development programs and enhanced driver safety criteria.

If we fail to generate sufficient cash flow from operations, we will need to raise additional equity or borrow additional funds to achieve our longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.

We believe that cash flow from operations coupled with existing cash balances will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through June 30, 2005. To the extent that actual results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.

Cash Flow

During the year ended June 30, 2004, we generated net income of $6.2 million compared with net income of $9.0 million for the year ended June 30, 2003. Net income for the year ended June 30, 2003 included a non-cash gain on the disposal of our Latin American operations of $12.5 million and a $1.4 million non-cash reversal of restructuring charges. Cash provided by operating activities totaled $14.5 million for the year ended June 30, 2004 and $13.1 million for the year ended June 30, 2003. At June 30, 2004, we had cash of $16.4 million, total debt of $305.6 million and a stockholders’ deficit of $192.2 million. Our total debt at June 30, 2004 primarily consists of $149.9 million of our 7 ⁷/8% Senior Notes due March 15, 2008 and $152.6 million outstanding under our credit facility.

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Throughout the year, we periodically experience significant outflows of cash. These outflows include our $5.9 million, semi-annual interest payments on our Senior Notes (these payments are due March 15 and September 15 through March 2008), as well as interest payments on our credit facility of approximately $1.1 million per month. In addition, annual workers’ compensation and general liability insurance premiums are paid in the fourth quarter of the fiscal year. These deposits totaled $7.2 million and $5.4 million in fiscal 2004 and 2003, respectively. Historically we have also paid a discretionary employer 401(k) matching contribution and management incentive bonuses, generally in the second quarter of the fiscal year. These payments totaled $3.9 million and $1.9 million in fiscal 2004 and 2003, respectively.

The table below summarizes cash flow information for the years ended June 30, 2004, 2003 and 2002 (in thousands):

	Years Ended June 30,
	2004			2003			2002
Net cash provided by operating activities	$	14,501		$	13,146		$	9,634
Net cash used in investing activities		(8,421	)		(7,582	)		(5,832	)
Net cash used in financing activities		(2,269	)		(3,659	)		(3,170	)

Operating activities - Cash provided by operating activities for the year ended June 30, 2004 primarily relates to net income of $6.2 million and depreciation and amortization of $12.3 million offset by the growth in accounts receivables of $4.9 million. The growth in receivables is primarily related to new service areas and transport growth in fiscal 2004 as compared to fiscal 2003.

Cash provided by operating activities for the year ended June 30, 2003 primarily relates to net income of $9.0 million and depreciation and amortization of $13.3 million offset by the non-cash portion of the gain on disposition of our Latin American operations of $13.7 million and a decrease in accrued and other liabilities of $3.3 million. The decrease in accrued and other liabilities is a result of timing of payments on several accruals including the usage of general liability and workers’ compensation claim reserves.

Cash provided by operating activities for the year ended June 30, 2002 primarily relates to a net loss of $48.2 million which includes the cumulative effect of change in accounting principal of $49.5 million. Other significant components of cash provided by operating activities include depreciation and amortization of $16.2 million offset by a decrease in accrued and other liabilities of $9.9 million. The decrease in accrued and other liabilities is a result of timing of payments on several accruals including the usage of general liability and workers’ compensation claim reserves.

Accounts receivable, net of the allowance for doubtful accounts, was $65.3 million and $60.4 million as of June 30, 2004 and 2003, respectively. The increase in net accounts receivable is primarily due to increased ambulance transports, rate increases, billings on new contracts and the timing of billings and collections. Days sales outstanding, calculated on a year to date basis, was 42 days and 44 days at June 30, 2004 and 2003, respectively. The allowance for doubtful accounts increased from approximately $48.4 million at June 30, 2003 to approximately $59.4 million at June 30, 2004, primarily as a result of the increase in revenue.

Average daily cash deposits totaled $1.8 million for both years ended June 30, 2004 and 2003, respectively. We experience several variables regarding the timing and amount of cash collected during any period. See further discussion of those variables in “Risk Factors – We depend on reimbursements by third-party payers and individuals.” While management believes that we have a predictable method of determining the realizable value of our accounts receivable, based on continuing difficulties in the healthcare reimbursement environment, there can be no assurance that there will not be additional future write-offs.

Investing activities – Cash used in investing activities primarily relates to capital expenditures. We had capital expenditures totaling $8.6 million and $9.4 million for the years ended June 30, 2004 and 2003, respectively.

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Financing activities – Cash used in financing activities primarily relates to repayments on debt and capital lease obligations as well as cash paid for debt modification costs and distributions to minority shareholders. Cash used in financing activities for the year ended June 30, 2004 includes a $1.0 million payment on our credit facility related to asset sale proceeds as required under the 2002 amendment to the credit facility and $1.2 million of principal payments on other debt and capital lease obligations.

We had working capital of $10.3 million at June 30, 2004, including cash of $16.4 million, compared to working capital of $1.6 million, including cash of $12.6 million, at June 30, 2003. The increase in working capital is primarily related to the increase in receivables due to increased transports, rate increases, billings on new contracts and the timing of billings and collections.

On June 10, 2004, our stockholders voted to amend our certificate of incorporation to authorize 17.0 million new shares of common stock at our annual meeting. On June 30, 2004 we settled our Series B Shares and Series C redeemable nonconvertible participating preferred stock (the “Series C Shares”) by issuing 4,955,278 shares of common stock to our lenders.

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Long Term Debt

Credit Facility:

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

Non-Compliance with Covenants under the 1998 Revolving Credit Facility – In December 1999, we were not in compliance with the total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio covenants contained in the original credit facility. We received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required us to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required us to make unscheduled principal payments totaling $5.2 million.

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2002 Amended Credit Facility/Issuance of Series B Shares – As discussed in Note 11 to our consolidated financial statements, we were not in compliance with the total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio covenants contained in our credit facility at June 30, 2002. Effective September 30, 2002, we entered into the 2002 Amended Credit Facility with our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7% and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million. Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with our business levels and outlook at that time.

In consideration for the amendment, we paid the lenders an amendment fee of $1.2 million as well as issued 211,549 of our Series B Shares. On June 30, 2004, we settled the Series B Shares by the issuance of 2,115,490 common shares. See further discussion on the Series B Shares at Note 13.

The 2002 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being amortized to interest expense over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled $2.3 million and $3.6 million as of June 30, 2004 and 2003, respectively.

Non-Compliance with Covenants under the 2002 Amended Credit Facility – As a result of a restatement to the consolidated financial statements for years prior to 2003, we were not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of our Form 10-Q for the quarter ended March 31, 2003, thereby causing us to fall out of compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.

2003 Amended Credit Facility/Issuance of Series C Shares – We entered into an amended credit facility, effective September 30, 2003, with our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 2002 amendment were revised to levels consistent with our current business levels. We also made a $1.0 million principal payment related to asset sale proceeds as required under the 2002 amendment. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.

In consideration for the amendment, we paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 of our Series C Shares. On June 30, 2004, we settled the Series C Shares by the issuance of 2,839,788 common shares. See further discussion on the Series C Shares at Note 13.

The 2003 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million amendment fee plus the estimated fair value of the Series C shares at the time of issuance of $3.4 million were capitalized as debt issue costs and will be amortized to interest expense over the term of the amended agreement. Professional fees and other related costs of $0.3 million incurred in connection with the amendment were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totaled $3.0 million at June 30, 2004.

For the year ended June 30, 2004, the weighted average interest rate on credit facility borrowings was approximately 8.92%. At June 30, 2004, there was $152.6 million outstanding on the credit facility as well as $2.5 million in letters of credit issued under the credit facility. The terms of the 2003 Amended Credit Facility do not permit additional borrowings thereunder.

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Current Covenants – The 2003 Amended Credit Facility includes various non-financial covenants similar in scope to those included in the 1998 Revolving Credit Facility. These covenants include restrictions on additional indebtedness, liens, investments, mergers and acquisitions, asset sales and other matters. The 2003 Amended Credit Facility includes extensive financial reporting obligations and provides that an event of default occurs should we lose customer contacts in any fiscal quarter with an aggregate earnings before interest, taxes, depreciation and amortization (“EBITDA”) contribution of $5.0 million or more (net of anticipated EBITDA contribution from new contracts). The revised financial covenants and levels achieved by us are presented below:

Financial Covenant	Period Covered By Covenant	Level Specified in Agreement	Level Achieved for Specified Period
Debt leverage ratio	Nine months ended June 30, 2004, annualized	< 7.45	6.41
Minimum tangible net worth	At June 30, 2004	< $280.0 million deficit	$244.7 million deficit
Fixed charge coverage ratio	Nine months ended June 30, 2004, annualized	> 1.05	1.23
Limitation on capital expenditures	Cumulative for fiscal year 2004	< $11.0 million	$8.6 million
Annual operating lease expense to consolidated net revenue	Nine months ended June 30, 2004, annualized	< 3.1%	2.2%

We must achieve the following levels of compliance at September 30, 2004: a total debt leverage ratio of less than 7.53; a minimum tangible net deficit of less than $280.0 million; a fixed charge coverage ratio of at least 1.03; annual capital expenditures less than $11.5 million; and, an annual operating lease expense equivalent to less than 3.10% of consolidated net revenue for the last twelve months.

Senior Notes:

In March 1998, we issued $150.0 million of 7 ⁷/8% Senior Notes due March 15, 2008 (the “Senior Notes”). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. We incurred expenses related to the offering of approximately $5.3 million and are amortizing such costs over the term of the Senior Notes. The Senior Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. The Senior Notes contain certain covenants that, among other items, limit our ability to incur certain indebtedness, sell assets or enter into certain mergers or consolidations.

Restrictions on Debt and Equity Financing

The terms of our 2003 Amended Credit Facility do not permit additional borrowings there under. In addition, the 2003 Amended Credit Facility and the Senior Notes restrict our ability to obtain additional debt from other sources or provide collateral to any prospective lender.

If we are unable to meet our targeted levels of operating cash flow, or in the event of an unanticipated cash requirement (such as an adverse litigation outcome, reimbursement delays, significantly increased costs of insurance or other matters) we may be limited in our ability to pursue additional debt or equity financing. See “Risk Factors — We may not be able to generate sufficient operating cash flow.”

If we fail to remain in compliance with financial and other covenants set forth in the 2003 Amended Credit Facility, we will also be in default under our Senior Notes. A default under the Senior Notes or 2003 Amended Credit Facility may, among other things, cause all amounts owed by us under such facilities to become due immediately upon such default. Any inability to resolve a violation through waivers or other means could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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There can be no assurance that we will not incur significant unanticipated liabilities. Similarly, there can be no assurance that we will be able to obtain additional debt or equity financing on terms satisfactory to us, or at all, should cash flow from operations and our existing cash resources prove to be inadequate. As discussed above, we will not have access to additional borrowings under such facility. If we are required to seek additional financing, any such arrangement may involve material and substantial dilution to existing stockholders resulting from, among other things, issuance of equity securities or the conversion of all or a portion of our existing debt to equity. In such event, the percentage ownership of our current stockholders will be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. If we require additional financing but are unable to obtain it, our business, financial condition, results of operations and cash flows may be materially adversely affected.

Insurance Programs

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

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

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

Since fiscal year 2000, we have experienced a substantial rise in the costs associated with our insurance program, including total premium costs, fees for TPAs to process claims, brokerage costs and other risk management expenses. These increases have primarily resulted from an increase in insurance premiums, our historical claim trends and the general increase in costs of claims and related litigation. See “Risk Factors — We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.”

General Liability - We have historically maintained insurance policies for comprehensive general liability, automobile liability and professional liability. Throughout this report, these three types of policies are referred to collectively as the “general liability policies.” These policies are typically renewed annually. We engage independent actuaries to assist us with our evaluation of the adequacy of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. See “Risk Factors – Our claim reserves may prove inadequate.”

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

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	13,935		$	15,433		$	19,715
Provision charged to other operating expense		7,020			4,506			2,442
Claim payments charged against the reserve		(5,219	)		(6,004	)		(6,724	)
Balance at end of year	$	15,736		$	13,935		$	15,433

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Cash deposits relating to our general liability program totaled $5.1 million at June 30, 2004 of which $2.4 million is included in prepaid expenses and other and $2.7 million is included in insurance deposits. Cash deposits relating to our general liability program totaled $2.9 million at June 30, 2003 of which $1.8 million is included in prepaid expenses and other and $1.1 million is included in insurance deposits.

Our general liability policies corresponding with fiscal years 2001 and 2002 were issued by Legion. Legion’s obligations under such policies were reinsured by Transatlantic Reinsurance Company (“Transatlantic”), an unrelated insurance carrier that was identified and approved by us. At the time the coverage was purchased, Legion was an “A” rated insurance carrier while Transatlantic was an A++ rated carrier. Under this policy, Legion’s obligation (as well as that of Transatlantic) to pay covered losses commences once we satisfy our aggregate retention limits for the respective policy years. We have met our aggregate retention limit with respect to the policy corresponding to fiscal 2001. Pursuant to this policy, Legion (and Transatlantic) is obligated to fund all claim-related payments in excess of our retention limits.

On July 25, 2003, the Pennsylvania Insurance Department (the “Department”) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the “Court”). On May 19, 2004, the Department, on behalf of Legion, Transatlantic, and Rural/Metro executed an Assumption Reinsurance and Substitution Agreement (the “Agreement”), whereby Transatlantic agreed to assume Legion’s obligations on the policies and be substituted as the primary insurance carrier on such policies. The Court approved the Agreement on May 26, 2004. As a result of the Agreement, Transatlantic will pay 70% of all claims and we will pay the remaining 30%. Our portion of this liability, which has been based on an actuarial calculation, has been included in the reserve for general liability claims as of June 30, 2004.

Workers’ Compensation - - We have historically maintained insurance policies for workers’ compensation and employer’s liability. We are required by law and by most of our operational contracts to maintain minimum statutory limits of workers’ compensation insurance. These policies are typically renewed annually. We also engage independent actuaries to assist with our evaluation of the adequacy of our workers’ compensation claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for workers’ compensation claims could be overstated or understated, See “Risk Factors – Our claim reserves may prove inadequate.”

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

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	11,255		$	15,924		$	14,944
Provision charged to payroll and employee benefits		—			—			7,318
Claim payments charged against the reserve		(3,165	)		(4,669	)		(6,338	)
Balance at end of year	$	8,090		$	11,255		$	15,924

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Effective May 1, 2002, we began fully insuring our workers’ compensation coverage and no longer retain any of the related obligations. We are, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a result of this change in coverage, we no longer establish reserves for claims incurred subsequent to April 30, 2002. We were subject to a premium payroll audit of the policy year that began May 1, 2002 which resulted in a refund of premiums of approximately $1.2 million.

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Additionally, we have also been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to our workers’ compensation program totaled $6.6 million at June 30, 2004 all of which is included in insurance deposits. Cash deposits relating to our workers’ compensation program totaled $6.8 million at June 30, 2003 all of which is included in insurance deposits.

During fiscal years 1992 through 2001, we purchased certain portions of our workers’ compensation coverage from Reliance. At the time we purchased such coverage, Reliance was an “A” rated insurance company. In connection with this coverage, we provided Reliance with various amounts and forms of collateral to secure our performance under the respective policies as was customary at the time. As of June 30, 2004 and 2003, we had $3.0 million of cash on deposit with Reliance, which is included in insurance deposits. We also have provided Reliance with letters of credit totaling $2.5 million and $3.5 million as of June 30, 2004 and 2003, respectively, which mature on December 31, 2004, and surety bonds totaling $2.6 million and $2.9 million as of June 30, 2004 and 2003, respectively.

On October 3, 2003, the Department placed Reliance into liquidation. Under a recently enacted Pennsylvania law (Act 46 of 2004, or “Act 46”), it is our understanding that cash on deposit with Reliance will be returned to us on or before the date that all related claims have been satisfied, so long as we have met our claim payment obligations within our retention limits under the related policies. Under Act 46, our cash cannot be used by the Reliance estate as a general asset but must be used in connection with our claims. Based on the information currently available, we believe that the cash on deposit with Reliance is fully recoverable and will either be returned to us or used by the liquidator, with our prior consent, to pay claims on our behalf. In the event that we are unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliance’s liquidation could put our workers’ compensation insurance coverage at risk for the related policy years; however, based upon information currently available, we believe that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent that such losses are not covered by either Reliance or the applicable state guaranty funds, we may be required to fund the related workers’ compensation claims for the applicable policy years. Our inability to access the funds on deposit with Reliance or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

During fiscal 2002, we purchased certain portions of our workers’ compensation coverage from Legion. Legion required assurances that we would be able to fund our related retention obligations, which were estimated by Legion to approximate $6.2 million. We provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (“Mutual Indemnity”), a Legion affiliate. That policy required us to deposit approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy our retention obligations under the Legion policy. We funded these deposits on a monthly basis during the policy term. As of June 30, 2004 and 2003, we had net deposits with respect to this coverage totaling $3.0 million and $3.3 million, respectively, which are included in insurance deposits.

As mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion liquidator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as us. It is our understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. We are actively participating in the Court proceedings to cause such a trust account or other mechanism to be created and to operate so as to fully cover all our deductible obligations as originally intended and to return to us any remaining deposit balance once all related claims have been closed. Even assuming such trust accounts are not created, under Act 46 the Legion liquidator is required to first utilize the cash deposits available with Mutual Indemnity before attempting to collect any amounts from us. Therefore, based on the information currently available, we believe that the amounts on deposit with Mutual Indemnity are fully recoverable and

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will either be returned to us or used to pay claims on our behalf. In the event that we, or the Legion liquidator are unable to access the funds on deposit with Mutual Indemnity, we may be required to fund the related workers’ compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. Our inability to access the funds on deposit with Mutual Indemnity or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. In fiscal 2003 and 2004, the Legion liquidator ordered our TPA to forward all workers’ compensation claims related to fiscal year 2002 to the state guarantee funds whom will be administering these claims. We have reserves in the amount of approximately $3.6 million and $4.4 million as of June 30, 2004 and 2003, respectively, relating to these claims as well as deposits in the amount of approximately $3.0 million and $3.3 million as of June 30, 2004 and 2003, respectively. Since these claims are not in our control, we may not be able to obtain current information as to the settlement of these claims and to the use of our deposits to satisfy these claims. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

Indemnifications

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

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

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

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

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

Nasdaq Listing

Dating back to May 22, 2003, we have had periodic correspondence with the Nasdaq regarding our noncompliance with certain of the Nasdaq SmallCap Market listing standards. Most recently, on July 12, 2004 we received notice from the Nasdaq Listing Qualifications Panel that we do not meet the market value of listed securities requirement for continued listing on the Nasdaq SmallCap Market. Effective with the open of business on July 13, 2004, our common stock began trading on the OTCBB. On July 21, 2004, we requested the Listing Council to review the Listing Qualification Panel’s decision. We are currently awaiting a decision from the Listing Council.

Effects of Inflation and Foreign Currency Exchange Fluctuations

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

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Contractual Obligations and Other Commitments

We have certain contractual obligations related to our debt instruments that come due at various times over the periods presented below. In addition we have other commitments in the form of standby letters of credit and surety bonds. The following table illustrates the expiration of our contractual obligations as well as other commitments as of June 30, 2004 (in thousands):

	Payments Due By Period
Contractual Obligations	Total		1 Year or Less		2-3 Years		4-5 Years		After 5 Years
Credit facility	$	152,555	$	—	$	152,555	$	—	$	—
Senior Notes		149,904		—		—		149,904		—
Capital leases and note payable		3,093		1,494		1,493		15		92
Operating leases		43,396		8,224		12,839		7,895		14,437
Total contractual cash obligations	$	348,948	$	9,718	$	166,887	$	157,814	$	14,529
Other Commitments	Amount of Commitment Expiration By Period
Standby letters of credit	$	2,500	$	2,500	$	—	$	—	$	—
Surety bonds	$	9,091	$	9,032	$	59	$	—	$	—
Self-insurance retention obligations	$	4,575	$	3,575	$	1,375	$	—	$	—

Quarterly Results

The following table summarizes our unaudited quarterly operating results for each quarter of fiscal 2004 and 2003 (in thousands, except per share amounts). Net revenue and operating income included in the table relate to our continuing operations and exclude amounts applicable to our Latin American operations that were disposed of in September 2002 and other service areas classified as discontinued operations.

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	2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net revenue	$	128,655		$	130,904		$	134,252		$	132,792
Operating income		9,005			9,532			8,919			8,071
Income from continuing operations		660			2,068			2,014			1,814
Net income		606			2,175			2,167			1,263
Basic income (loss) from continuing operations applicable to common stock per share	$	(0.04	)	$	(0.01	)	$	(0.01	)	$	0.60
Basic income (loss) per share	$	(0.04	)	$	(0.01	)	$	(0.00	)	$	0.57
Diluted income (loss) from continuing operations applicable to common stock per share	$	(0.04	)	$	(0.01	)	$	(0.01	)	$	0.08
Diluted income (loss) per share	$	(0.04	)	$	(0.01	)	$	(0.00	)	$	0.06
	2003
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net revenue	$	120,621		$	119,534		$	121,636		$	122,848
Operating income		5,934			6,551			7,598			1,919
Loss from continuing operations		(882	)		(1,413	)		(164	)		(4,979	)
Net income (loss)		12,753			(252	)		535			(4,070	)
Basic loss from continuing operations applicable to common stock per share (1)	$	(0.06	)	$	(0.16	)	$	(0.08	)	$	(0.39	)
Basic income (loss) per share (1)	$	0.80		$	(0.09	)	$	(0.05	)	$	(0.33	)
Diluted loss from continuing operations applicable to common stock per share (1)	$	(0.06	)	$	(0.16	)	$	(0.08	)	$	(0.39	)
Diluted income (loss) per share (1)	$	0.80		$	(0.09	)	$	(0.05	)	$	(0.33	)

(1) As described in Note 2 to our consolidated financial statements, we restated our earnings per share amounts for the fiscal year ended June 30, 2003 as well as for certain interim periods in fiscal 2003 as a result of the issuance of EITF 03-6 in March 2004 which clarified the use of the “two-class” method. As a result, basic and diluted earnings per share for the quarter ended June 30, 2003 decreased by ($0.03) per share. On June 30, 2004, the Series B and Series C Shares were settled by the issuance of 4,955,278 common shares.

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RISK FACTORS

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

We have significant indebtedness.

As of June 30, 2004, we had approximately $305.6 million of consolidated indebtedness, consisting primarily of $149.9 million of 7 ⁷/8% Senior Notes due March 15, 2008 and $152.6 million outstanding under our 2003 Amended Credit Facility, which is due December 31, 2006.

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

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

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

•      incur certain additional debt	•      create certain liens
•      pay dividends	•      issue guarantees
•      redeem capital stock	•      enter into transactions with affiliates
•      make certain investments	•      sell assets
•      issue capital stock of subsidiaries	•      complete certain mergers and consolidations

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

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

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

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

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

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

We receive a substantial portion of payments for our medical transportation services from third-party payers, including Medicare, Medicaid, and private insurers. We received approximately 90% of our medical transportation fee collections from such third party payers during the year ended June 30, 2004, including approximately 28% from Medicare. In the year ended June 30, 2003, we received 90% of medical transportation fee collections from these third parties, including 27% from Medicare.

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

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

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

The risks associated with third-party payers and uninsured individuals and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

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

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

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

Our claim reserves may prove inadequate.

Under our general liability and employee medical insurance programs, and under our workers’ compensation programs prior to May 1, 2002, we are responsible for deductibles and self-insurance retentions in varying amounts. Our insurance coverages in prior years generally did not include an aggregate limitation on our liability. We have established reserves for losses and loss adjustment expenses under these policies. Our reserves are estimates based on our historical experience as well as industry data, and include judgments of the effects that future economic and social forces are likely to have on our experience with the type of risk involved, circumstances surrounding individual claims and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently uncertain and are subject to a number of circumstances that are difficult to predict. For these reasons, there can be no assurance that our ultimate liability will not materially exceed our reserves at any point. If our reserves prove to be inadequate, we will be required to increase our reserves with a corresponding charge to operations in the period in which the deficiency is identified and such charge could be material. We periodically engage independent actuaries in order to verify the adequacy of our claims reserves.

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

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

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

Prior to April 1, 2002, when the national fee schedule began a five-year phase-in, Medicare used a charge-based reimbursement system for ambulance services and reimbursed 80% of charges determined to be reasonable, subject to the limits fixed for the particular geographic area. The patient was responsible for co-pay amounts, deductibles and the remaining balance, if we did not accept the assigned reimbursement, and Medicare required us to expend reasonable efforts to collect the balance. In determining reasonable charges, Medicare considered and applied the lowest of various charge factors, including the actual charge, the customary charge, the prevailing charge in the same locality, the amount of reimbursement for comparable services, or the inflation-indexed charge limit.

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

Originally, the Final Rule called for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The national fee schedule was to be phased in at 20-percent increments each year, with payments being made at 100 percent of the national fee schedule in 2006 and thereafter.

With the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, modifications were made to the phase in of the ambulance fee schedule. Effective July 1, 2004, a regional fee schedule component of reimbursement is being phased in with the original national fee schedule. In addition, the new legislation extended the phase-in period to 2010. Under the new rules, the Medicare allowable reimbursement rate will be the greater of (a) the national fee schedule, or (b) a blend of the national fee schedule and the regional fee schedule. For 2004 that blended rate will be 20% of the national fee schedule and 80% of the regional fee schedule. For each succeeding year through 2007, the percentages will increase 20% for the national fee schedule and decrease 20% for the regional fee schedule portions of the blended rate. For 2008 and 2009, the fee schedule will remain at the 2007 mix of 20% regional and 80% national. In addition to the fee schedule changes, a provision for additional reimbursement for ambulance services was provided to Medicare patients. Among other relief, the Act provides for a 1% increase in reimbursement for urban transports and a 2% increase for rural transports for the remainder of the original phase-in period of the national ambulance fee schedule or through 2006. Although we expect this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will benefit the portion of our medical transportation revenue that is reimbursed through Medicare, we are currently unable to predict the total impact.

Reimbursement by Medicare accounted for 28%, 27%, and 25% of our domestic net ambulance fee collections for 2004, 2003, and 2002, respectively.

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

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

State or local government regulations or administrative policies regulate rate structures in some states in which we conduct medical transportation operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract and establishes the rates for general ambulance services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. For example, the State of Arizona establishes the rate of return we are permitted to earn in determining the ambulance service rates we may charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 21% of net revenue for both years ended June 30, 2004 and 2003. We may be unable to receive ambulance service rate increases on a timely basis where rates are regulated or to establish or maintain satisfactory rate structures where rates are not regulated.

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

Numerous governmental entities regulate our business.

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

• change existing laws, rules or regulations,

• adopt new laws, rules or regulations that increase our cost of doing business,

• lower reimbursement levels,

• choose to provide services for themselves, or

• otherwise adversely affect our business, financial condition, cash flows, and results of operations.

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

Health care reforms and cost containment may affect our business.

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

In addition to compliance with the privacy standards deadline, the HIPAA Electronic Transactions and Code Set Rule required us, if we submit claims electronically, to use the approved HIPAA format by October 16, 2003. On September 23, 2003, CMS announced that it would issue a contingency plan to accept Medicare noncompliant electronic transactions after the October 16, 2003 compliance deadline. The contingency plan permits CMS to continue to accept and process Medicare claims in legacy formats giving providers, like us, additional time to complete the testing process. We are filing in the approved HIPAA format with all of our Medicare plans. We submit Medicaid claims to 19 states, of which 11 states allow electronic claim submissions and eight accept paper claim submissions. As of September 16, 2004, we received confirmation of at least one successful test filing from all of the 11 states that accept electronic claim submissions. We have completed the testing process in nine states and are continuing to test our submissions in two states. These two states, New York and Pennsylvania, will allow legacy formats until testing is complete. In addition, we await announcements from the commercial insurers regarding compliance with the final rule.

The security final rule was issued on February 20, 2003 and requires compliance by most health care providers by April 20, 2005. This rule requires health care providers and other entities to set security standards for health information and to maintain reasonable and appropriate safeguards to ensure the integrity and confidentiality of this information. It also requires that we protect health information against unauthorized use or disclosure. We are developing the appropriate policies and procedures in order to comply with the final security rule.

While we have worked diligently to both comply with HIPAA requirements and mitigate the impact of HIPAA on our business, we could experience a material adverse effect on our business, financial condition, cash flows or results of operations due to; (i) significant costs associated with continued compliance under HIPAA or related legislative enactments, (ii) adverse affects on our collection cycle arising from non-compliance or delayed HIPAA compliance by our payers, customers and other constituents, or (iii) impacts to the health care industry as a whole that may directly or indirectly cause an adverse affect on our business.

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We depend on certain business relationships.

We depend to a great extent on certain contracts with municipalities or fire districts to provide emergency ambulance services and fire protection services. Our six largest contracts accounted for approximately 17% of net revenue for each of the years ended June 30, 2004 and 2003. One of these contracts accounted for approximately 4% of net revenue for each of the years ended June 30, 2004 and 2003, respectively. Contracts with municipalities or fire districts may have certain budgetary approval constraints. Failure to allocate funds for a contract may adversely affect our ability to continue to perform services without suffering significant losses. The loss or cancellation of several of these contracts could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may not be successful in retaining our existing contracts or in obtaining new contracts for emergency ambulance services or for fire protection services. Our contracts with municipalities and fire districts and with managed care organizations and health care providers are short term or open-ended or for periods ranging on average from two years to five years. During such periods, we may determine that a contract is no longer favorable and may seek to modify or terminate the contract. When making such a determination, we may consider factors, such as weaker than expected transport volume, geographical issues adversely affecting response times, and delays in implementing technology upgrades. We face certain risks in attempting to terminate unfavorable contracts prior to their expiration because of the possibility of forfeiting performance bonds and the potential adverse political and public relations consequences. Our inability to terminate or amend unfavorable contracts as they occur, could, in the aggregate, have a material adverse effect on our business, financial condition, cash flows, and results of operations. We also face the risk that areas in which we provide fire protection services through subscription arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities.

We are in a highly competitive industry.

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

• quality of medical care,

• historical response time performance,

• customer service,

• financial stability, and

• personnel policies and practices.

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

• governmental entities (including fire districts),

• hospitals,

• other national ambulance service providers,

• large regional ambulance service providers, and

• local and volunteer private providers.

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

Tax-supported fire districts, municipal fire departments, and volunteer fire departments represent the principal providers of fire protection services for residential and commercial properties. Private providers represent only a small portion of the total fire protection market and generally provide services where a tax-supported municipality or fire district has decided to contract for these services or has not assumed the financial responsibility for fire protection. In these

55

situations, we provide services for a municipality or fire district on a contract basis or provide fire protection services directly to residences and businesses who subscribe for this service. We cannot provide assurance that:

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

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

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

We depend on our management and other key personnel.

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

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

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

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks

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

ITEM 8. Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Rural/Metro Corporation and its subsidiaries (the “Company”) at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Company changed its method of calculating earnings per share under the two-class method. Additionally, as discussed in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001.

PricewaterhouseCoopers LLP

Phoenix, Arizona

September 27, 2004

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RURAL/METRO CORPORATION

CONSOLIDATED BALANCE SHEET

(in thousands)

	As of June 30,
	2004			2003
ASSETS
Current assets:
Cash	$	16,372		$	12,561
Accounts receivable, net of allowance for doubtful accounts of $59,430 and $48,422 at June 30, 2004 and 2003, respectively		65,348			60,428
Inventories		11,738			11,504
Prepaid expenses and other		8,512			7,511
Total current assets		101,970			92,004
Property and equipment, net		40,283			43,010
Goodwill		41,100			41,167
Insurance deposits		9,244			7,937
Other assets		12,644			12,048
Total assets	$	205,241		$	196,166
LIABILITIES, MINORITY INTEREST, REDEEMABLE NONCONVERTIBLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	13,833		$	13,778
Accrued liabilities		57,273			57,698
Deferred revenue		18,650			17,603
Current portion of long-term debt		1,495			1,329
Total current liabilities		91,251			90,408
Long-term debt, net of current portion		304,057			305,310
Other liabilities		—			181
Deferred income taxes		650			650
Total liabilities		395,958			396,549
Minority interest		1,509			1,984
Redeemable nonconvertible participating preferred stock		—			7,793
Stockholders’ equity (deficit):
Common stock, $.01 par value, 40,000,000 shares authorized, 21,890,816 and 16,315,367 shares issued and outstanding at June 30, 2004 and 2003, respectively		222			166
Additional paid-in capital		147,072			135,405
Treasury stock		(1,239	)		(1,239	)
Accumulated deficit		(338,281	)		(344,492	)
Total stockholders’ equity (deficit)		(192,226	)		(210,160	)
	$	205,241		$	196,166

See accompanying notes

58

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands)

	Years Ended June 30,
	2004			2003			2002
Net revenue	$	526,603		$	484,639		$	453,151
Operating expenses:
Payroll and employee benefits		277,549			266,713			250,724
Provision for doubtful accounts		87,268			77,184			70,689
Depreciation and amortization		11,404			12,587			14,443
Other operating expenses		114,855			107,574			96,581
Restructuring and other		—			(1,421	)		(626	)
Total operating expenses		491,076			462,637			431,811
Operating income		35,527			22,002			21,340
Interest expense		(29,243	)		(28,012	)		(25,462	)
Interest income		97			197			644
Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		6,381			(5,813	)		(3,478	)
Income tax (provision) benefit		(300	)		(118	)		2,531
Minority interest		475			(1,507	)		(750	)
Income (loss) from continuing operations before cumulative effect of change in accounting principle		6,556			(7,438	)		(1,697	)
Income (loss) from discontinued operations		(345	)		16,404			3,046
Income before cumulative effect of change in accounting principle		6,211			8,966			1,349
Cumulative effect of change in accounting principle		—			—			(49,513	)
Net income (loss)		6,211			8,966			(48,164	)
Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method		(1,262	)		—			—
Less: Accretion of redeemable nonconvertible participating preferred stock		(6,320	)		(3,604	)		—
Add: Credit related to settlement of redeemable nonconvertible participating preferred stock with common stock		10,066			—			—
Net income (loss) applicable to common stock	$	8,695		$	5,362		$	(48,164	)

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	Years Ended June 30,
	2004			2003			2002
Income (loss) per share
Basic -
Income (loss) from continuing operations applicable to common stock before the cumulative effect of change in accounting principle	$	0.54		$	(0.69	)	$	(0.11	)
Income (loss) from discontinued operations applicable to common stock		(0.02	)		1.02			0.20
Income before cumulative effect of change in accounting principle		0.52			0.33			0.09
Cumulative effect of change in accounting principle		—			—			(3.26	)
Net income (loss)	$	0.52		$	0.33		$	(3.17	)
Diluted-
Income (loss) from continuing operations applicable to common stock before the cumulative effect of change in accounting principle	$	0.30		$	(0.69	)	$	(0.11	)
Income (loss) from discontinued operations applicable to common stock		(0.02	)		1.02			0.20
Income before cumulative effect of change in accounting principle		0.28			0.33			0.09
Cumulative effect of change in accounting principle		—			—			(3.26	)
Net income (loss)	$	0.28		$	0.33		$	(3.17	)
Average number of common shares outstanding - Basic		16,645			16,116			15,190
Average number of common shares outstanding - Diluted		21,817			16,116			15,190

See accompanying notes

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RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT )

(in thousands)

	Common Stock		Additional Paid-in Capital			Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance at July 1, 2001	$	152	$	137,948		$	(1,239	)	$	(305,294	)	$	14		$	(168,419	)
Issuance of 559,668 shares of common stock under the Employee Stock Purchase Plan		5		264			—			—			—			269
Issuance of 191,507 shares of common stock due to options exercised under Stock Option Plans		2		185			—			—			—			187
Fair value of options issued to non-employee		—		73			—			—			—			73
Comprehensive loss, net of tax:
Net loss		—		—			—			(48,164	)		—			(48,164	)
Foreign currency translation adjustments		—		—			—			—			10,302			10,302
Comprehensive loss																(37,862	)
Balance at June 30, 2002		159		138,470			(1,239	)		(353,458	)		10,316			(205,752	)
Issuance of 570,801 shares of common stock under the Employee Stock Purchase Plan		6		336			—			—			—			342
Issuance of 93,471 shares of common stock due to options exercised under Stock Option Plans		1		64			—			—			—			65
Non-cash stock compensation expense relating to stock option modification		—		139			—			—			—			139
Accretion of redeemable preferred stock		—		(3,604	)		—			—			—			(3,604	)
Comprehensive loss, net of tax:
Net income		—		—			—			8,966			—			8,966
Foreign currency translation adjustments		—		—			—			—			(242	)		(242	)
Recognition of foreign currency translation adjustments in conjunction with the disposition of Latin American operations		—		—			—			—			(10,074	)		(10,074	)
Comprehensive loss																(1,350	)
Balance at June 30, 2003		166		135,405			(1,239	)		(344,492	)		—			(210,160	)
Issuance of 341,430 shares of common stock under the Employee Stock Purchase Plan		3		309			—			—			—			312
Issuance of 278,741 shares of common stock due to options exercised under Stock Option Plans		3		179			—			—			—			182
Issuance of 4,955,278 shares of common stock upon settlement of redeemable preferred stock		50		7,433			—			—			—			7,483
Accretion of redeemable preferred stock		—		(6,320	)		—			—			—			(6,320	)
Credit related to settlement of redeemable preferred stock with common shares		—		10,066			—			—			—			10,066
Comprehensive income, net of tax:
Net income		—		—			—			6,211			—			6,211
Comprehensive income																6,211
Balance at June 30, 2004	$	222	$	147,072		$	(1,239	)	$	(338,281	)	$	—		$	(192,226	)

See accompanying notes

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RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Years Ended June 30,
	2004			2003			2002
Cash flows from operating activities:
Net income (loss)	$	6,211		$	8,966		$	(48,164	)
Adjustments to reconcile net income (loss) to cash provided by operating activities -
Non-cash portion of gain on disposition of Latin American operations		—			(13,732	)		—
Non-cash reversal of restructuring charge and other		—			(1,421	)		(718	)
Depreciation and amortization		12,256			13,313			16,210
(Gain) loss on sale of property and equipment		39			(540	)		(285	)
Provision for doubtful accounts		91,477			85,046			77,880
Earnings (losses) of minority shareholder		(475	)		1,507			750
Amortization of deferred financing costs		2,753			2,038			726
Amortization of debt discount		26			26			26
Non-cash portion of contract termination charges		—			—			(107	)
Cumulative effect of change in accounting principle		—			—			49,513
Deferred income taxes		—			—			(300	)
Non-cash stock compensation expense		—			—			73
Other		—			(176	)		(8	)
Change in assets and liabilities -
Increase in accounts receivable		(96,397	)		(81,589	)		(73,771	)
(Increase) decrease in inventories		(234	)		656			948
Increase in prepaid expenses and other		(1,001	)		(476	)		(2,792	)
(Increase) decrease in insurance deposits		(1,307	)		291			(4,492	)
(Increase) decrease in other assets		(477	)		126			1,871
Increase in accounts payable		55			1,545			1,453
Increase (decrease) in accrued liabilities and other liabilities		528			(3,342	)		(9,881	)
Increase in deferred revenue		1,047			908			702
Net cash provided by operating activities		14,501			13,146			9,634
Cash flows from investing activities:
Capital expenditures		(8,646	)		(9,400	)		(6,854	)
Proceeds from the sale of property and equipment		225			1,818			1,022
Net cash used in investing activities		(8,421	)		(7,582	)		(5,832	)
Cash flows from financing activities:
Repayments on credit facility		(1,000	)		—			(1,263	)
Repayment of debt and capital lease obligations		(1,248	)		(1,569	)		(1,862	)
Distributions to minority shareholders		—			(914	)		(501	)
Cash paid for debt modification costs		(515	)		(1,583	)		—
Proceeds from the issuance of common stock		494			407			456
Net cash used in financing activities		(2,269	)		(3,659	)		(3,170	)
Effect of currency exchange rate changes on cash		—			(21	)		302
Increase in cash		3,811			1,884			934
Cash, beginning of year		12,561			10,677			9,743
Cash, end of year	$	16,372		$	12,561		$	10,677

See accompanying notes

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(1) The Company and its Significant Accounting Policies

Nature of Business and Operations

Rural/Metro Corporation, a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a diversified emergency services company providing medical transportation, fire protection and other related services in 23 states. The Company provides emergency and non-emergency ambulance services to patients on both a non-refundable subscription fee basis and a fee-for-service basis. Fire protection services are provided either under contracts with municipalities or fire districts, or on a subscription fee basis to individual homeowners or commercial property owners. Through September 27, 2002, the Company provided urgent home medical care and ambulance services under capitated service arrangements in Latin America.

Use of Estimates

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

Principles of Consolidation

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

Revenue Recognition

Medical transportation and related services revenue includes emergency and non-emergency ambulance and alternative transportation service fees as well as municipal subsidies and subscription fees. Domestic ambulance and alternative transportation service fees are recognized as services are provided and are recorded net of estimated discounts applicable to Medicare, Medicaid and other third-party payers. Such discounts applicable to continuing operations, which totaled $180.0 million, $147.9 million and $131.9 million in fiscal 2004, 2003 and 2002, respectively, are reflected in net revenue in the accompanying consolidated statement of operations. Ambulance subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year.

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

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

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An allowance for doubtful accounts is based on historical collection trends, credit risk assessments applicable to certain types of payers and other relevant information. A summary of activity in the Company’s allowance for doubtful accounts during the fiscal years ended June 30, 2004, 2003 and 2002 is as follows (in thousands):

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	48,422		$	37,966		$	60,812
Provision for doubful accounts - continuing operations		87,268			77,184			70,689
Provision for doubful accounts - discontinued operations		4,209			7,862			7,191
Write-offs of uncollectible accounts		(80,469	)		(74,590	)		(100,726	)
Balance at end of year	$	59,430		$	48,422		$	37,966

Inventories

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

Property and Equipment

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

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of tangible and intangible net assets acquired. Goodwill is not amortized. The Company reviews its goodwill balances for impairment annually (and interim periods if events or changes in circumstances indicate that the related asset may be impaired) using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual goodwill impairment test on June 30.

Impairment of Other Long-Lived Assets

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

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Income Taxes

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

Stock Compensation

The Company accounts for employee stock compensation using the intrinsic value method specified by Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations (“APB 25”). The Company accounts for stock-based compensation arrangements with non-employees in accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”).

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

Because stock option exercise prices have equaled the market price of the Company’s common stock on the date of grant, stock compensation expense has not been reflected in the accompanying consolidated statement of operations at the date of grant. Stock compensation expense has been recognized for certain modifications made to existing stock options at the time of such modifications. The Company has computed, for pro forma disclosure purposes, the value of all option shares granted and Employee Stock Purchase Program (“ESPP”) discounts during fiscal years 2004, 2003 and 2002, using the Black-Scholes option pricing model with the following weighted average assumptions:

	Years Ended June 30,
	2004				2003				2002
	Option		ESPP		Option		ESPP		Option		ESPP
Risk-free interest rate	1.95	%	1.18	%	1.61	%	1.38	%	2.27	%	1.89	%
Expected dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Expected lives in years (after vesting for options)	1.20		0.5		1.21		0.5		2.72		0.5
Expected volatility	137.53	%	100.00	%	143.51	%	100.00	%	80.33	%	119.30	%

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

	Options		ESPP
For the year ended June 30, 2004	$	13	$	96
For the year ended June 30, 2003		2,554		102
For the year ended June 30, 2002		409		77

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

	Years Ended June 30,
	2004			2003			2002
Net income (loss) applicable to common stock	$	8,695		$	5,362		$	(48,164	)
Deduct: Stock based employee compensation determined under the fair value method for all awards applicable to common stock, net of tax		(621	)		(1,605	)		(585	)
Proforma net income (loss) applicable to common stock	$	8,074		$	3,757		$	(48,749	)
Income (loss) per share:
Basic - As reported	$	0.52		$	0.33		$	(3.17	)
Basic - Pro forma	$	0.48		$	0.23		$	(3.21	)
Diluted - As reported	$	0.28		$	0.33		$	(3.17	)
Diluted - Pro forma	$	0.25		$	0.23		$	(3.21	)

The effects of applying SFAS 123 for providing pro forma disclosures for fiscal years 2004, 2003 and 2002 are not likely to be representative of the effects on reported net income (loss) and diluted income (loss) per share for future years, because options vest over several years and additional awards are made each year.

Earnings Per Share

The Company calculates earnings per share following the guidance outlined in SFAS No. 128, “Earnings Per Share” (“SFAS 128”), as well as related guidance issued by the EITF and the Securities and Exchange Commission (“SEC”). As a result of the issuance of its redeemable nonconvertible participating preferred shares (“Series B Shares” in September 2002 and “Series C Shares” in September 2003), the Company began calculating earnings per share using the “two-class” method described in SFAS 128 whereby net income (loss) for the period is allocated between common shares and other participating securities on the basis of the weighted average number of common shares and common share equivalents outstanding during a given period. This allocation was also impacted by the accretion of the Series B and Series C Shares to their respective cash redemption values as described in Note 13. Under SFAS 128 and related EITF and SEC guidance, basic earnings per share is calculated using the two-class method while diluted earnings per share is calculated using the two-class method or the “if converted” method, whichever is more dilutive.

As a result of the issuance in March 2004 of EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF 03-6”), described in Note 2, the Company modified the manner in which net income (loss) is allocated under the two-class method.

As described in Note 13, the Company settled the Series B and Series C Shares on June 30, 2004 by exchanging such shares for shares of its common stock. As a result, use of the two-class method will no longer be required.

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A reconciliation of the numerators and denominators (weighted average number of shares outstanding) utilized in the basic and diluted income (loss) per share computations for the years ended June 30, 2004, 2003 and 2002 are as follows (in thousands, except per share amounts):

	Years Ended June 30,
	2004			2003			2002
Income (loss) from continuing operations	$	6,556		$	(7,438	)	$	(1,697	)
Less: Income from continuing operations allocated to redeemable nonconvertible participating preferred stock under the two-class method		(1,262	)		—			—
Less: Accretion of redeemable nonconvertible participating preferred stock		(6,320	)		(3,604	)		—
Add: Credit related to settlement of redeemable nonconvertible participating preferred stock with common stock		10,066			—			—
Income (loss) from continuing operations applicable to common stock	$	9,040		$	(11,042	)	$	(1,697	)
Average number of shares outstanding - Basic		16,645			16,116			15,190
Add: Incremental shares for:
Dilutive effect of stock options		927			—			—
Settlement of Series B and Series C redeemable nonconvertible participating preferred stock		4,245			—			—
Average number of shares outstanding - Diluted		21,817			16,116			15,190
Income (loss) per share - Basic:
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	0.54		$	(0.69	)	$	(0.11	)
Income (loss) per share - Diluted:
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	0.30		$	(0.69	)	$	(0.11	)

As a result of anti-dilutive effects, approximately 1.4 million and 0.6 million option shares for the years ended June 30, 2003 and 2002, respectively, which had exercise prices below the applicable market prices, were not included in the computation of diluted loss per share. Stock options with exercise prices above the applicable market prices have also been excluded from the calculation of diluted income (loss) per share. Such options totaled 4.2 million, 4.8 million and 4.4 million for the years ended June 30, 2004, 2003 and 2002, respectively.

Foreign Currency Translation

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

In order to prepare the accompanying financial statements for the years ended June 30, 2003 and 2002, the Company translated the statements of operations and cash flows of its Argentine subsidiaries through September 27, 2002 using the weighted average exchange rate in effect during the respective period.

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Concentrations of Credit Risk

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

Reclassifications of 2003 and 2002 Financial Information

Certain financial information relating to prior years has been reclassified to conform with the current year presentation.

(2) Accounting Change

In March 2004, the EITF of the Financial Accounting Standards Board issued EITF 03-6. Under this guidance, which is effective for periods beginning after March 31, 2004, losses for a given period will not be allocated to participating securities unless the holder of such securities has a contractual obligation to fund losses of the issuing entity or the contractual principal or mandatory redemption amount of the participating security is reduced as a result of losses incurred by the Company. As a result of the EITF 03-6 guidance, the Company no longer allocates losses in any given interim or annual period to its Series B shares and Series C Shares for purposes of calculating earnings per share as the holders of such shares were neither required to fund losses of the Company nor would the redemption amounts of such shares have been reduced as a result of losses incurred by the Company. Earnings per share amounts for the year ended June 30, 2003 (as well as for certain quarterly periods within that year) have been restated to reflect this new guidance as required by EITF 03-6. As a result, basic and diluted earnings per share for the year ended June 30, 2003 were both increased by $0.05 per share.

(3) Liquidity

During fiscal 2004, the Company generated net income of $6.2 million compared with net income of $9.0 million in fiscal 2003 and a net loss of $48.2 million in fiscal 2002. Net income in fiscal 2003 included a gain of $12.5 million relating to the disposal of the Company’s Latin American operations as discussed in Note 4. The net loss in fiscal 2002 included a charge of $49.5 million relating to the adoption, effective July 1, 2001, of SFAS 142 as discussed in Note 7. The Company’s operating activities provided cash totaling $14.5 million in 2004, $13.1 million in 2003 and $9.6 million in 2002.

At June 30, 2004, the Company had cash of $16.4 million, debt of $305.6 million and a stockholders’ deficit of $192.2 million. The Company’s long-term debt primarily consists of $149.9 million of 7 ⁷/8% Senior Notes due March 2008 and $152.6 million outstanding under its credit facility due December 31, 2006.

Management does not believe that cash flow from operations will be sufficient to satisfy the principal payment required on the 2003 Amended Credit Facility that will be due on December 31, 2006. Consequently, we will seek to refinance the credit facility with cash obtained through additional borrowings or the issuance of additional equity. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company.

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

If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. Management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as enable it to maintain in compliance with its various debt agreements through June 30, 2005. To the extent that actual results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.

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(4) Discontinued Operations

Domestic Discontinued Operations

During fiscal 2004, the Company ceased operating in 10 medical transportation service areas as a result of these service areas not meeting internal operational and profitability measures. The Company also ceased operating in three fire and other service areas, one of which was due to the customer filing Chapter 11, one of which was sold, as the Company continues to dispose of non-core businesses and one of which was due to the city converting the service area to a fire district. The results of these service areas for the years ended June 30, 2004, 2003 and 2002 are included in income (loss) from discontinued operations.

On June 18, 2004, the Company entered into an agreement to sell one of its fire and other service areas which is included in discontinued operations as of June 30, 2004. Net revenue related to this service area totaled approximately $0.3 million, $0.3 million and $0.4 million for the years ended June 30, 2004, 2003 and 2002, respectively. This service area generated net income of approximately $0.2 million for each of the years ended June 30, 2004, 2003 and 2002. Net assets of this service area were approximately $0.2 million and $0.3 million as of June 30, 2004 and 2003, respectively.

Latin America

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

Results of discontinued operations for the years ended June 30, 2004, 2003 and 2002 are as follows (in thousands):

	Years Ended June 30,
	2004			2003		2002
Revenue:
Medical transportation and related services	$	13,128		$	30,393	$	30,675
Fire and other		3,701			5,450		5,154
Latin America		—			2,388		25,394
	$	16,829		$	38,231	$	61,223
Net income (loss):
Medical transportation and related services	$	(1,108	)	$	3,146	$	1,209
Fire and other		763			925		858
Latin America		—			12,332		979
	$	(345	)	$	16,404	$	3,046

(5) Restructuring and Other

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

The previously mentioned charge included accrued severance, lease termination and other costs totaling $1.5 million relating to an under performing service area that the Company had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, the

69

Company released $0.2 million of previously accrued lease termination costs relating to the extension period to income. The operating environment in this service area improved and in November 2002, the Company was awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million originally recorded in 2001 was released to income during fiscal 2003.

A summary of activity in the Company’s restructuring reserves are as follows (in thousands):

	Severance Costs			Lease Termination Costs			Other Exit Costs			Total
Balance at July 1, 2001	$	1,834		$	3,234		$	1,101		$	6,169
Fiscal 2002 usage		(1,025	)		(1,172	)		(951	)		(3,148	)
Adjustments		(52	)		(548	)		(118	)		(718	)
Balance at June 30, 2002		757			1,514			32			2,303
Fiscal 2003 usage		(29	)		(207	)		(71	)		(307	)
Adjustments		(728	)		(732	)		39			(1,421	)
Balance at June 30, 2003		—			575			—			575
Fiscal 2004 usage		—			(212	)		—			(212	)
Balance at June 30, 2004	$	—		$	363		$	—		$	363

The restructuring reserve as of June 30, 2004 relates to lease termination costs for which payments will be made through December 2006.

(6) Property and Equipment

Property and equipment, including equipment held under capital leases, consisted of the following (in thousands):

	As of June 30,
	2004			2003
Equipment	$	56,821		$	55,641
Vehicles		76,805			74,715
Land and buildings		16,684			16,715
Leasehold improvements		6,457			6,632
		156,767			153,703
Less: Accumulated depreciation		(116,484	)		(110,693	)
	$	40,283		$	43,010

The Company had vehicles and equipment with a gross carrying value of approximately $4.5 million and $12.9 million at June 30, 2004 and 2003, respectively, under capital lease agreements. Accumulated depreciation on these assets totaled approximately $4.3 million and $11.5 million at June 30, 2004 and 2003, respectively.

The Company has pledged land, a building, leasehold improvements and equipment with a net book value of approximately $10.7 million to secure certain of its obligations under its insurance and surety bonding programs.

(7) Goodwill and Other Intangible Assets

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) effective July 1, 2001 and discontinued amortization of goodwill as of that date. During the first quarter of fiscal 2002, the Company identified its various reporting units which consist of the individual cost centers within its Medical Transportation and Fire and Other operating segments for which separately identifiable cash flow information is available. During the second quarter of fiscal 2002, the Company completed the first step impairment test as of July 1, 2001. Potential goodwill impairments

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were identified in certain of these reporting units. During the fourth quarter of fiscal 2002, the Company completed the second step test and determined that all or a portion of the goodwill applicable to certain of its reporting units was impaired as of July 1, 2001 resulting in an aggregate charge of $49.5 million. The fair value of the reporting units was determined using the discounted cash flow method and a discount rate of 15.0%. This charge has been reflected in the accompanying consolidated statement of operations as the cumulative effect of change in accounting principle.

The changes in the carrying amount of goodwill during fiscal 2004, 2003 and 2002 are as follows (in thousands):

	Medical Transportation Segment			Fire and Other Segment			Total
Balance at July 1, 2001	$	89,598		$	1,159		$	90,757
Adoption of SFAS No. 142		(49,513	)		—			(49,513	)
Balance at June 30, 2002		40,085			1,159			41,244
Disposition of Latin American operations		(77	)		—			(77	)
Balance at June 30, 2003		40,008			1,159			41,167
Impairment write-down		—			(67	)		(67	)
Balance at June 30, 2004	$	40,008		$	1,092		$	41,100

As discussed in Note 4, on June 18, 2004, the Company entered into an agreement to sell one of its fire and other service areas. The proposed selling price was less than the carrying amount of the service area, including goodwill. The Company performed a related impairment analysis and recognized an impairment write-down of approximately $0.1 million in the year ended June 30, 2004.

The changes in the carrying amount of other intangible assets during fiscal 2004, 2003 and 2002 are as follows (in thousands):

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	1,462		$	600		$	1,654
Additions		—			1,065			—
Impairment write-offs		(799	)		—			—
Amortization		(238	)		(203	)		(1,054	)
Balance at end of year	$	425		$	1,462		$	600

Other intangible assets are generally comprised of non-compete agreements relating to prior business combinations and are included in other assets on the consolidated balance sheet. During 2004, the Company wrote off the remaining balance of a non-compete agreement for one of its medical transportation and related service areas in the amount of approximately $0.4 million associated with one of its discontinued medical transportation and related service areas. Additionally, the Company wrote off the remaining balance of a non-compete agreement for one of its medical transportation and related service areas in the amount of approximately $0.4 million upon the death of a related individual. This amount has been included in depreciation and amortization expense in the consolidated statement of operations.

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

2005	$	135
2006		110
2007		110
2008		55
2009		1
Thereafter		14
	$	425

(8) Other Assets

Other assets consist of the following (in thousands):

	As of June 30,
	2004		2003
Debt issuance costs (see Note 11)	$	7,375	$	6,177
Note receivable - officer (see Note 19)		1,393		—
Intangible assets, net (see Note 7)		425		1,462
Other		3,451		4,409
Total other assets	$	12,644	$	12,048

(9) Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	As of June 30,
	2004		2003
Workers compensation claim reserves (see Note 10)	$	8,090	$	11,255
General liability claim reserves (see Note 10)		15,736		13,935
Accrued salaries, wages and related payroll		11,890		11,433
Accrued interest		5,270		4,370
Other		16,287		16,705
Total accrued liabilities	$	57,273	$	57,698

The decrease in workers compensation claim reserves is primarily the result of the settlement of claims from policy years ending prior to April 30, 2002. Effective May 1, 2002, the Company began fully insuring its workers’ compensation coverage and no longer retains any of the related obligations. The increase in general liability claim reserves is primarily a result of claims within the Company’s retention level for fiscal 2004 offset by payments on current and prior years’ claims.

(10) General Liability and Workers’ Compensation Programs

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

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

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

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	13,935		$	15,433		$	19,715
Provision charged to other operating expense		7,020			4,506			2,442
Claim payments charged against the reserve		(5,219	)		(6,004	)		(6,724	)
Balance at end of year	$	15,736		$	13,935		$	15,433

Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Company’s retention limits. Cash deposits relating to the Company’s general liability program totaled $5.1 million at June 30, 2004 of which $2.4 million is included in prepaid expenses and other and $2.7 million is included in insurance deposits. Cash deposits totaled $2.9 million at June 30, 2003 of which $1.8 million is included in prepaid expenses and other and $1.1 million is included in insurance deposits.

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

On July 25, 2003, the Pennsylvania Insurance Department (the “Department”) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the “Court”). On May 19, 2004, the Department, on behalf of Legion, Transatlantic, and the Company executed an Assumption Reinsurance and Substitution Agreement (the “Agreement”), whereby Transatlantic agreed to assume Legion’s obligations on the policies and be substituted as the primary insurance carrier on such policies. The Court approved the Agreement on May 26, 2004. As a result of the Agreement, Transatlantic will pay 70% of all claims and the Company will pay the remaining 30%. The Company’s portion of this liability, which has been based on an actuarial calculation, has been included in the reserve for general liability claims as of June 30, 2004.

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

	As of June 30,
	2004			2003			2002
Balance at beginning of year	$	11,255		$	15,924		$	14,944
Provision charged to payroll and employee benefits		—			—			7,318
Claim payments charged against the reserve		(3,165	)		(4,669	)		(6,338	)
Balance at end of year	$	8,090		$	11,255		$	15,924

Effective May 1, 2002, the Company began fully insuring its workers’ compensation coverage and no longer retains any of the related obligations. The Company is, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a result of this change in coverage, the Company no longer establishes reserves for claims incurred subsequent to April 30, 2002. The Company was subject to a premium payroll audit of the policy year that began May 1, 2002 which resulted in a refund of premiums of approximately $1.2 million.

Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Company’s retention limits. Additionally, the Company has been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to the Company’s workers’ compensation program totaled $6.6 and $6.8 million at June 30, 2004 and 2003, respectively, and are included in insurance deposits.

During fiscal years 1992 through 2001, the Company purchased certain portions of its workers’ compensation coverage from Reliance Insurance Company (“Reliance”). At the time the Company purchased such coverage, Reliance was an “A” rated insurance company. In connection with this coverage, the Company provided Reliance with various amounts and forms of collateral to secure its performance under the respective policies as was customary at the time. As of June 30, 2004 and 2003, the Company had $3.0 million of cash on deposit with Reliance, which is included in insurance deposits. The Company has also provided Reliance with letters of credit totaling $2.5 million and $3.5 million, which mature on December 31, 2004, and surety bonds totaling $2.6 million and $2.9 million as of June 30, 2004 and 2003, respectively.

On October 3, 2003, the Department placed Reliance into liquidation. Under a recently enacted Pennsylvania law (Act 46 of 2004, or “Act 46”), it is the Company’s understanding that cash on deposit with Reliance will be returned to the Company on or before the date that all related claims have been satisfied, so long as the Company has met its claim payment obligations within its retention limits under the related policies. Under Act 46, the Company’s cash cannot be used by the Reliance estate as a general asset but must be used in connection with the Company’s claims. Based on the information currently available, the Company believes the cash on deposit with Reliance is fully recoverable and will either be returned to the Company or used by the liquidator, with the Company’s prior consent, to pay claims on its behalf. In the event the Company is unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliance’s liquidation could put the Company’s workers’ compensation insurance coverage at risk for the related policy years; however, based upon information currently available, the Company believes that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent that such losses are not covered by either Reliance or the applicable state guaranty funds, the Company may be required to fund the related workers’ compensation claims for the applicable policy years.

During fiscal 2002, the Company purchased certain portions of its workers’ compensation coverage from Legion. Legion required assurances that the Company would be able to fund its related retention obligations, which were estimated by Legion to approximate $6.2 million. The Company provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (“Mutual Indemnity”), a Legion affiliate. That policy required the Company to deposit approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy the Company’s retention obligations under the Legion policy. The Company funded these deposits on a monthly basis during the policy term. As of June 30, 2004 and 2003, the Company had net deposits with respect to this coverage totaling $3.0 million and $3.3 million, respectively, which are included in insurance deposits.

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As mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion liquidator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as the Company. It is the Company’s understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. The Company is actively participating in the Court proceedings to cause such a trust account mechanism to be created and to operate so as to fully cover all its deductible obligations as originally intended and to return to the Company any remaining deposit balance once all related claims have been closed. Even assuming such trust accounts are not created, under Act 46 the Legion liquidator is required to first utilize the cash deposits available with Mutual Indemnity before attempting to collect any amounts from the Company. Therefore, based on the information currently available, the Company believes that the amounts on deposit with Mutual Indemnity are fully recoverable and will either be returned to the Company or used to pay claims on its behalf. In the event that the Company or the Legion liquidator are unable to access the funds on deposit with Mutual Indemnity, the Company may be required to fund the related workers’ compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. The Company’s inability to access the funds on deposit with Mutual Indemnity or obtain state guaranty fund coverage could have a material adverse effect on its business, financial condition, results of operations and cash flows. In fiscal 2003 and 2004, the Legion liquidator ordered the Company’s TPA to forward all workers’ compensation claims related to fiscal year 2002 to the state guarantee funds whom will be administering these claims. The Company has reserves in the amount of approximately $3.6 million and $4.4 million as of June 30, 2004 and 2003, respectively, relating to these claims as well as deposits in the amount of approximately $3.0 million and $3.3 million as of June 30, 2004 and 2003, respectively. Since these claims are not in the Company’s control, it may not be able to obtain current information as to the settlement of these claims and to the use of their deposits to satisfy these claims.

(11) Long-Term Debt

Notes payable and capital lease obligations consisted of the following (in thousands):

	As of June 30,
	2004			2003
7 7/8% senior notes due March 2008	$	149,904		$	149,877
Credit facility due December 2006		152,555			152,420
Capital leases and other obligations, at varying rates from 6.0% to 12.75%, due through 2013		3,093			4,342
		305,552			306,639
Less: Current maturities		(1,495	)		(1,329	)
	$	304,057		$	305,310

Credit Facility

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

Non-Compliance with Covenants under the 1998 Revolving Credit Facility – In December 1999, the Company was not in compliance with the total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio covenants contained in the original credit facility. The Company received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required the Company to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required the Company to make unscheduled principal payments totaling $5.2 million.

2002 Amended Credit Facility/Issuance of Series B Shares – The Company was not in compliance with the total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio covenants contained in its credit facility at June 30, 2002. Effective September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the

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maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7%, and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million. Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with the Company’s business levels and outlook at that time.

In consideration for the amendment, the Company paid the lenders an amendment fee of $1.2 million as well as issued 211,549 of its Series B Shares. On June 30, 2004, the Company settled the Series B Shares by the issuance of 2,115,490 common shares. See further discussion on the Series B Shares in Note 13.

The 2002 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B Shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being amortized to interest expense over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheets, totalled $2.3 million and $3.6 million as of June 30, 2004 and 2003, respectively.

Non-Compliance with Covenants under the 2002 Amended Credit Facility - As a result of a restatement of its consolidated financial statements for years prior to 2003, the Company was not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of the Company’s Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to fall out of compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.

2003 Amended Credit Facility/Issuance of Series C Shares – The Company entered into an amended credit facility, effective September 30, 2003, with its lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 2002 amendment were revised to levels consistent with the Company’s business levels and outlook at that time. The Company also made a $1.0 million principal payment related to asset sale proceeds as required under the 2002 amendment. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.

In consideration for the amendment, the Company paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 of its Series C Shares. On June 30, 2004, the Company settled the Series C Shares by the issuance of 2,839,788 common shares. See further discussion on the Series C Shares in Note 13.

The 2003 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million amendment fee plus the estimated fair value of the Series C Shares at the time of issuance of $3.4 million were capitalized as debt issue costs and are being amortized to interest expense over the term of the amended agreement. Professional fees and other related costs of $0.3 million incurred in connection with the amendment were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totaled $3.0 million at June 30, 2004.

For the year ended June 30, 2004, the weighted average interest rate on credit facility borrowings was approximately 8.92%. At June 30, 2004, there was $152.6 million outstanding on the credit facility as well as $2.5 million in letters of credit issued under the credit facility. The terms of the 2003 Amended Credit Facility do not permit additional borrowings thereunder.

7 ⁷/8% Senior Notes Due 2008

In March 1998, the Company issued $150.0 million of its 7 ⁷/8% Senior Notes due 2008 (the “Senior Notes”). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. The Company incurred expenses related to the offering of approximately $5.3 million and is amortizing these costs to interest expense over the life of the Senior Notes. The Senior Notes are general unsecured obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by substantially all of its domestic wholly-owned current and future subsidiaries (the “Guarantors”). The Senior Notes contain certain covenants that, among other things, limit the Company’s ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.

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

RURAL/METRO CORPORATION

CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2004

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	—		$	15,934		$	438		$	—		$	16,372
Accounts receivable, net		—			57,548			7,800			—			65,348
Inventories		—			11,611			127			—			11,738
Prepaid expenses and other		—			8,510			2			—			8,512
Total current assets		—			93,603			8,367			—			101,970
Property and equipment, net		—			40,113			170			—			40,283
Goodwill		—			41,100			—			—			41,100
Insurance deposits		—			9,244			—			—			9,244
Due from (to) affiliates		226,261			(200,207	)		(26,054	)		—			—
Other assets		7,371			4,745			528			—			12,644
Investment in subsidiaries		(122,012	)		—			—			122,012			—
Total assets	$	111,620		$	(11,402	)	$	(16,989	)	$	122,012		$	205,241
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		—			12,586			1,247			—			13,833
Accrued liabilities		1,387			55,481			405			—			57,273
Deferred revenue		—			18,650			—			—			18,650
Current portion of long-term debt		—			1,495			—			—			1,495
Total current liabilities		1,387			88,212			1,652			—			91,251
Long-term debt, net of current portion		302,459			1,598			—			—			304,057
Deferred income taxes		—			650			—			—			650
Total liabilities		303,846			90,460			1,652			—			395,958
Minority interest		—			—			—			1,509			1,509
Stockholders’ equity (deficit):
Common stock		222			82			8			(90	)		222
Additional paid-in capital		147,072			54,622			20,168			(74,790	)		147,072
Treasury stock		(1,239	)		—			—			—			(1,239	)
Accumulated deficit		(338,281	)		(156,566	)		(38,817	)		195,383			(338,281	)
Total stockholders’ equity (deficit)		(192,226	)		(101,862	)		(18,641	)		120,503			(192,226	)
	$	111,620		$	(11,402	)	$	(16,989	)	$	122,012		$	205,241

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RURAL/METRO CORPORATION

CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2003

(in thousands)

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

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RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JUNE 30, 2004

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue	$	—		$	500,584		$	47,888		$	(21,869	)	$	526,603
Operating expenses:
Payroll and employee benefits		—			275,278			2,271			—			277,549
Provision for doubtful accounts		—			75,953			11,315			—			87,268
Depreciation and amortization		—			11,326			78			—			11,404
Other operating expenses		252			100,791			35,681			(21,869	)		114,855
Total operating expenses		252			463,348			49,345			(21,869	)		491,076
Operating income (loss)		(252	)		37,236			(1,457	)		—			35,527
Equity in earnings of subsidiaries		35,521			—			—			(35,521	)		—
Interest expense		(29,058	)		(185	)		—			—			(29,243	)
Interest income		—			96			1			—			97
Income (loss) from continuing operations before income taxes and minority interest		6,211			37,147			(1,456	)		(35,521	)		6,381
Income tax (provision) benefit		—			(305	)		5			—			(300	)
Minority interest		—			—			—			475			475
Income (loss) from continuing operations		6,211			36,842			(1,451	)		(35,046	)		6,556
Income (loss) from discontinued operations		—			909			(1,254	)		—			(345	)
Net income (loss)	$	6,211		$	37,751		$	(2,705	)	$	(35,046	)	$	6,211

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RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JUNE 30, 2003

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue	$	—		$	458,260		$	45,024		$	(18,645	)	$	484,639
Operating expenses:
Payroll and employee benefits		—			264,953			1,760			—			266,713
Provision for doubtful accounts		—			67,203			9,981			—			77,184
Depreciation and amortization		—			12,490			97			—			12,587
Other operating expenses		1,603			93,155			31,461			(18,645	)		107,574
Restructuring charge and other		—			(1,401	)		(20	)		—			(1,421	)
Total operating expenses		1,603			436,400			43,279			(18,645	)		462,637
Operating (loss) income		(1,603	)		21,860			1,745			—			22,002
Equity in earnings of subsidiaries		37,224			12,488			—			(49,712	)		—
Interest expense		(26,655	)		(1,357	)		—			—			(28,012	)
Interest income		—			197			—			—			197
Income (loss) from continuing operations before income taxes and minority interest		8,966			33,188			1,745			(49,712	)		(5,813	)
Income tax provision		—			(118	)		—			—			(118	)
Minority interest		—			—			—			(1,507	)		(1,507	)
Income (loss) from continuing operations		8,966			33,070			1,745			(51,219	)		(7,438	)
Income from discontinued operations		—			2,459			1,457			12,488			16,404
Net income (loss)	$	8,966		$	35,529		$	3,202		$	(38,731	)	$	8,966

80

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JUNE 30, 2002

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue	$	—		$	432,371		$	36,753		$	(15,973	)	$	453,151
Operating expenses:
Payroll and employee benefits		—			249,146			1,578			—			250,724
Provision for doubtful accounts		—			63,559			7,130			—			70,689
Depreciation and amortization		—			14,322			121			—			14,443
Other operating expenses		—			85,505			27,049			(15,973	)		96,581
Restructuring charge and other		—			(697	)		71			—			(626	)
Total operating expenses		—			411,835			35,949			(15,973	)		431,811
Operating income		—			20,536			804			—			21,340
Equity in earnings of subsidiaries		24,812			—			—			(24,812	)
Interest expense		(24,107	)		(404	)		(951	)		—			(25,462	)
Interest income		644			—			—			—			644
Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		1,349			20,132			(147	)		(24,812	)		(3,478	)
Income tax benefit		—			2,531			—			—			2,531
Minority interest		—			—			—			(750	)		(750	)
Income (loss) from continuing operations before cumulative effect of change in accounting principle		1,349			22,663			(147	)		(25,562	)		(1,697	)
Income from discontinued operations		—			1,522			1,524			—			3,046
Income (loss) before cumulative effect of change in accounting principle		1,349			24,185			1,377			(25,562	)		1,349
Cumulative effect of change in accounting principle		(49,513	)		(49,513	)		—			49,513			(49,513	)
Net income (loss)	$	(48,164	)	$	(25,328	)	$	1,377		$	23,951		$	(48,164	)

81

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JUNE 30, 2004

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flow from operating activities:
Net income (loss)	$	6,211		$	37,751		$	(2,705	)	$	(35,046	)	$	6,211
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities -
Depreciation and amortization		—			11,760			496			—			12,256
Loss on sale of property and equipment		—			34			5			—			39
Provision for doubtful accounts		—			80,419			11,058			—			91,477
Losses of minority shareholder		—			—			—			(475	)		(475	)
Amortization of deferred financing costs		2,753			—			—			—			2,753
Amortization of debt discount		26			—			—			—			26
Change in assets and liabilities ---
Increase in accounts receivable		—			(88,465	)		(7,932	)		—			(96,397	)
Increase in inventories		—			(107	)		(127	)		—			(234	)
(Increase) decrease in prepaid expenses and other		—			(1,043	)		42			—			(1,001	)
Increase in insurance deposits		—			(1,307	)		—			—			(1,307	)
Increase in other assets		—			50			(527	)		—			(477	)
Increase (decrease) in due to/from affiliates		(6,700	)		(28,156	)		(665	)		35,521			—
Increase (decrease) in accounts payable		—			499			(444	)		—			55
Increase (decrease) in accrued liabilities and other liabilities		(1,269	)		1,656			141			—			528
Increase in deferred revenue		—			1,047			—			—			1,047
Net cash provided by (used in) operating activities		1,021			14,138			(658	)		—			14,501
Cash flows from investing activities:
Capital expenditures		—			(8,542	)		(104	)		—			(8,646	)
Proceeds from the sale of property and equipment		—			224			1			—			225
Net cash used in investing activities		—			(8,318	)		(103	)		—			(8,421	)
Cash flows from financing activities:
Repayments on credit facility		(1,000	)		—			—			—			(1,000	)
Repayment of debt and capital lease obligations		—			(1,248	)		—			—			(1,248	)
Cash paid for debt modification costs		(515	)		—			—			—			(515	)
Proceeds from the issuance of common stock		494			—			—			—			494
Net cash used in financing activities		(1,021	)		(1,248	)		—			—			(2,269	)
Increase (decrease) in cash		—			4,572			(761	)		—			3,811
Cash, beginning of year		—			11,362			1,199			—			12,561
Cash, end of year	$	—		$	15,934		$	438		$	—		$	16,372

82

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JUNE 30, 2003

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flow from operating activities:
Net income	$	8,966		$	35,529		$	3,202		$	(38,731	)	$	8,966
Adjustments to reconcile net income to cash provided by operating activities -
Non-cash portion of gain on disposition of Latin American operations		139			—			(13,871	)		—			(13,732	)
Non-cash reversal of restructuring charge and other		—			(1,401	)		(20	)		—			(1,421	)
Depreciation and amortization		—			13,131			182			—			13,313
Gain on sale of property and equipment		—			(406	)		(134	)		—			(540	)
Provision for doubtful accounts		—			74,320			10,726			—			85,046
Earnings of minority shareholder		—			—			—			1,507			1,507
Amortization of deferred financing costs		2,038			—			—			—			2,038
Amortization of debt discount		26			—			—			—			26
Deferred income taxes		—			(1,164	)		1,164			—			—
Other		—			(176	)		—			—			(176	)
Change in assets and liabilities ---
Increase in accounts receivable		—			(69,386	)		(12,203	)		—			(81,589	)
(Increase) decrease in inventories		—			674			(18	)		—			656
Increase in prepaid expenses and other		—			(391	)		(85	)		—			(476	)
Decrease in insurance deposits		—			291			—			—			291
(Increase) decrease in other assets		1,842			(2,757	)		1,041			—			126
Increase (decrease) in due to/from affiliates		(12,290	)		(32,653	)		7,740			37,203			—
Increase in accounts payable		—			977			568			—			1,545
Increase (decrease) in accrued liabilities and other liabilities		476			(6,532	)		2,714			—			(3,342	)
Increase in deferred revenue		—			908			—			—			908
Net cash provided by operating activities		1,197			10,964			1,006			(21	)		13,146
Cash flows from investing activities:
Capital expenditures		—			(9,251	)		(149	)		—			(9,400	)
Proceeds from the sale of property and equipment		—			1,780			38			—			1,818
Net cash used in investing activities		—			(7,471	)		(111	)		—			(7,582	)
Cash flows from financing activities:
Repayment of debt and capital lease obligations		—			(1,555	)		(14	)		—			(1,569	)
Distributions to minority shareholders		—			—			(914	)		—			(914	)
Cash paid for debt modification costs		(1,583	)		—			—			—			(1,583	)
Proceeds from the issuance of common stock		407			—			—			—			407
Net cash used in financing activities		(1,176	)		(1,555	)		(928	)		—			(3,659	)
Effect of currency exchange rate changes on cash		(21	)		—			(21	)		21			(21	)
Increase (decrease) in cash		—			1,938			(54	)		—			1,884
Cash, beginning of year		—			9,424			1,253			—			10,677
Cash, end of year	$	—		$	11,362		$	1,199		$	—		$	12,561

83

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JUNE 30, 2002

(in thousands)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flow from operating activities:
Net income (loss)	$	(48,164	)	$	(25,338	)	$	1,377		$	23,961		$	(48,164	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities -
Non-cash reversal of restructuring charge and other		—			(618	)		(100	)		—			(718	)
Depreciation and amortization		—			15,128			1,082			—			16,210
(Gain) loss on sale of property and equipment		—			152			(437	)		—			(285	)
Provision for doubtful accounts		—			69,964			7,916			—			77,880
Earnings of minority shareholder		—			—			—			750			750
Amortization of deferred financing costs		726			—			—			—			726
Amortization of debt discount		26			—			—			—			26
Non-cash portion of contract termination charges		—			(107	)		—			—			(107	)
Cumulative effect of change in accounting principle		—			49,513			—			—			49,513
Deferred income taxes		—			(300	)		—			—			(300	)
Non-cash stock compensation expense		73			—			—			—			73
Other		—			(8	)		—			—			(8	)
Change in assets and liabilities ---
Increase in accounts receivable		—			(67,533	)		(6,238	)		—			(73,771	)
Decrease in inventories		—			915			33			—			948
(Increase) decrease in prepaid expenses and other		(51	)		(2,756	)		15			—			(2,792	)
Increase in insurance deposits		—			(4,492	)		—			—			(4,492	)
(Increase) decrease in other assets		(819	)		3,861			(1,171	)		—			1,871
Increase (decrease) in due to/from affiliates		46,114			(19,723	)		(1,982	)		(24,409	)		—
Increase (decrease) in accounts payable		—			1,571			(118	)		—			1,453
Increase (decrease) in accrued liabilities and other liabilities		2,600			(10,633	)		(1,848	)		—			(9,881	)
Increase in deferred revenue		—			702			—			—			702
Net cash provided by (used in) operating activities		505			10,298			(1,471	)		302			9,634
Cash flows from investing activities:
Capital expenditures		—			(6,360	)		(494	)		—			(6,854	)
Proceeds from the sale of property and equipment		—			422			600			—			1,022
Net cash provided by (used in) investing activities		—			(5,938	)		106			—			(5,832	)
Cash flows from financing activities:
Repayments on credit facility		(1,263	)		—			—			—			(1,263	)
Repayment of debt and capital lease obligations		—			(1,700	)		(162	)		—			(1,862	)
Distributions to minority shareholders		—			—			(501	)		—			(501	)
Proceeds from the issuance of common stock		456			—			—			—			456
Net cash used in financing activities		(807	)		(1,700	)		(663	)		—			(3,170	)
Effect of currency exhange rate changes on cash		302			—			302			(302	)		302
Increase (decrease) in cash		—			2,660			(1,726	)		—			934
Cash, beginning of year		—			6,763			2,980			—			9,743
Cash, end of year	$	—		$	9,423		$	1,254		$	—		$	10,677

84

Debt Maturities

Aggregate annual maturities on long-term debt as of June 30, 2004 for each of the fiscal years ending June 30, are as follows (in thousands):

2005	$	1,495
2006		1,476
2007		152,570
2008		149,904
2009		15
Thereafter		92
	$	305,552

The Company incurred interest expense of approximately $29.2 million, $28.0 million and $25.5 million and paid interest of approximately $28.3 million, $25.4 million and $21.9 million in the years ended June 30, 2004, 2003 and 2002, respectively.

The Company had outstanding letters of credit totaling approximately $2.5 million, which mature on December 31, 2004 and $3.5 million at June 30, 2004 and 2003, respectively, for insurance and guarantees under contracts.

(12) Income Taxes

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

	Year ended June 30,
	2004			2003			2002
Current:
Federal	$	—		$	—		$	—
State		(300	)		(118	)		(119	)
Total current provision		(300	)		(118	)		(119	)
Deferred:
Federal		—			—			2,650
State		—			—			—
Total deferred benefit		—			—			2,650
Total (provision) benefit	$	(300	)	$	(118	)	$	2,531

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

85

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

	2004			2003			2002
Federal income tax (provision) benefit at statutory rate	$	(2,232	)	$	1,109		$	753
State taxes, net of federal benefit		(191	)		(77	)		(74	)
Change in valuation allowance		3,475			(994	)		1,951
Other, net		(1,352	)		(156	)		(99	)
Total (provision) benefit	$	(300	)	$	(118	)	$	2,531

The following table summarizes the components of the Company’s net deferred tax liability as of June 30, 2004 and 2003 (in thousands):

	As of June 30,
	2004			2003
Deferred tax assets:
Net operating loss carryforwards	$	85,019		$	82,906
Capital loss carryforwards		14,630			14,630
Accelerated depreciation and amortization		6,615			10,575
Accounts receivable valuations		5,359			6,335
Insurance claim reserves		10,845			11,382
Compensation and benefits		1,952			2,052
Other		1,778			1,987
Deferred tax assets		126,198			129,867
Deferred tax liabilities:
Partnership losses		(6,606	)		(6,800	)
Other		(650	)		(650	)
Deferred tax liabilities		(7,256	)		(7,450	)
Net deferred tax assets before valuation allowance		118,942			122,417
Less: Valuation allowance		(119,592	)		(123,067	)
Net deferred tax liability	$	(650	)	$	(650	)

As of June 30, 2004, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $202 million and $301 million, respectively, which expire in 2014-2024. The Company also had capital loss carryforwards for federal income tax purposes of approximately $38 million, which expire in 2006-2009. If the Company experiences an ownership change as defined by the Internal Revenue Code, its ability to utilize its carryforwards may be limited.

86

The Company maintains a valuation allowance for the portion of its net deferred tax assets for which it is more likely than not that the related benefits will not be realized. The valuation allowance, which totaled $119.6 million, $123.1 million and $124.1 million at June 30, 2004, 2003 and 2002, respectively, was based upon management’s analysis of available information including the net operating losses experienced in recent years. The Company will begin to release the valuation allowance when it is more likely than not that the deferred tax asset will be realized.

Cash payments (refunds) for income taxes were $0.3 million, $0.3 million and ($2.2 million) during the years ended June 30, 2004, 2003 and 2002, respectively.

(13) Redeemable Nonconvertible Participating Preferred Stock

As discussed in Note 11, in connection with the 2002 Amended Credit Facility and the 2003 Amended Credit Facility, the Company issued 211,549 Series B Shares and 283,979 Series C Shares to certain of its lenders.

The Company recorded the Series B and Series C Shares at their estimated fair value at the date of issuance ($4.2 million and $3.4 million, respectively) with an offsetting increase in debt issue costs, which are included in other assets in the consolidated balance sheet. Due to the cash redemption clauses (as discussed above), such shares were classified outside of stockholders’ equity (deficit). Additionally, the original value of the Series B and Series C Shares was being accreted to their respective redemption values through December 31, 2004 and December 31, 2006, respectively, with an offsetting charge to additional paid-in capital. Series B Share accretion totaled $4.8 million and $3.6 million for the years ended June 30, 2004 and 2003, respectively. Series C Share accretion totaled $1.5 million for the year ended June 30, 2004.

As a sufficient number of common shares were not available to permit settlement, the Company sought and obtained stockholder approval at its Annual Meeting of Stockholders held on June 10, 2004 to amend its certificate of incorporation to authorize additional common shares. The amendment increased the Company’s authorized common shares from 23,000,000 to 40,000,000.

On June 30, 2004, the Company settled the Series B and Series C Shares by the issuance of 4,955,278 common shares. Due to the settlement of the Series B and Series C Shares, as of June 30, 2004 there are currently no Series B or Series C Shares outstanding, and the related rights and privileges associated with the Series B or Series C Shares expired upon the settlement. On September 10, 2004, the Company received written notice from the holders of at least 20% of the outstanding common stock that was issued upon settlement of the Series B and Series C Shares requesting the registration of the common shares issued upon settlement of the Series B and Series C Shares. The Company is proceeding with the registration process required by the registration rights agreement, although no definitive completion date has been established.

The fair market value of the common shares issued to effect the settlement of the Series B and Series C Shares was $7.5 million based upon a closing price of $1.51 per share. The Series B and the Series C Shares had carrying values of $12.6 million and $5.0 million at the date of settlement, respectively, which represented the original issuance amount plus accretion through June 30, 2004. The $10.1 million difference between the fair market value of the common shares and the carrying value of the Series B and Series C Shares on the date of settlement was credited to additional paid in capital.

Both the Series B Shares and the Series C Shares were not convertible by the holder but could be settled at the Company’s option by the issuance of 10 common shares to for each preferred share. At the election of the holder, the Series B and Series C Shares carried voting rights as if such shares were converted into common shares. The Series B and Series C Shares were not entitled to a dividend except if declared by the Board. In the event a dividend was declared on the Company’s common stock, the holders of the Series B and Series C Shares would have been entitled to receive at least the equivalent amount of dividends they would have received had their Series B and Series C Shares been converted to common stock. The Series B and Series C Shares were, and the common shares issued upon settlement of the Series B and Series C Shares are, entitled to certain registration rights. The terms of the Series B and Series C Shares limited the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.

87

Had the Series B Shares not been settled by December 31, 2004, the Company would have been required to redeem the Series B Shares for a price equal to the greater of $15.0 million or the value of the common shares into which the Series B Shares would otherwise have been convertible. Had the Series C Shares not been settled by December 31, 2006, the Company would have been required to redeem the Series C Shares for a price equal to the greater of $10.0 million or the value of the common shares into which the Series C Shares would otherwise have been convertible.

(14) Stockholders’ Rights Plan

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

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

(15) Employee Benefit Plans

Employee Stock Purchase Plan

The Company established the ESPP through which eligible employees could purchase shares of the Company’s common stock at semi-annual intervals through periodic payroll deductions. The ESPP is a qualified employee benefit plan under Section 423 of the Internal Revenue Code. The Company had reserved 2,150,000 shares of stock for issuance under the ESPP. The purchase price per share was the lower of 85% of the closing price of the stock on the first day or the last day of the offering period or on the nearest prior day on which trading occurred. Employees purchased 341,430, 570,801 and 559,668 shares of the Company’s common stock under the ESPP during fiscal years 2004, 2003 and 2002, respectively, at average per share prices of $0.98, $0.60 and $0.48. The ESPP expired on June 30, 2004.

1992 Stock Option Plan

The Company’s 1992 Stock Option Plan (the “1992 Plan”) was adopted in November 1992 and expired November 5, 2002. The 1992 Plan provided for the granting of up to 6.0 million options to acquire common stock of the Company, direct granting of the common stock of the Company (“Stock Awards”), the granting of stock appreciation rights (“SARs”), or the granting of other cash awards (“Cash Awards”) (Stock Awards, SARs and Cash Awards are collectively referred to herein as “Awards”). At June 30, 2004, approximately 962,000 options had been exercised. Approximately 3.8 million options remain outstanding under the 1992 Plan at June 30, 2004. Options were granted as incentive stock options or non-qualified stock options.

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

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

88

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

2000 Non-Qualified Stock Option Plan

The Company’s 2000 Non-Qualified Stock Option Plan (the “2000 Plan”) was adopted in August 2000 and provides for the granting of options to acquire common stock of the Company. At the time of adoption, the maximum number of shares of common stock issuable under the 2000 Plan was 2.0 million of which approximately 372,000 options have been exercised. Approximately 1.2 million of options remain outstanding under the 2000 Plan as of June 30, 2004.

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

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

89

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

	Year Ended June 30, 2004
	Number of Shares		Exercise Price Per Share		Weighted Average Exercise Price
Options outstanding at beginning of year	6,130,291		$	0.39 - $36.00	$	5.25
Granted	10,000		$	1.89	$	1.89
Cancelled	(859,598	)	$	0.39 - $32.25	$	4.43
Exercised	(278,965	)	$	0.39 - $2.00	$	0.65
Options outstanding at end of year	5,001,728		$	0.39 - $36.00	$	5.65
Options exercisable at end of year	4,538,146		$	0.39 - $36.00	$	6.04
Options available for grant at end of year	442,329
Weighted average fair value per share of options granted					$	1.29

	Year Ended June 30, 2003
	Number of Shares		Exercise Price Per Share		Weighted Average Exercise Price
Options outstanding at beginning of year	5,198,978		$	0.39 - $36.00	$	7.79
Granted	1,697,000		$	2.00 - $2.24	$	2.00
Cancelled	(672,216	)	$	0.39 - $32.88	$	15.60
Exercised	(93,471	)	$	0.39 - $1.50	$	0.69
Options outstanding at end of year	6,130,291		$	0.39 - $36.00	$	5.25
Options exercisable at end of year	4,173,976		$	0.39 - $36.00	$	7.00
Options available for grant at end of year	265,246
Weighted average fair value per share of options granted granted					$	1.43

	Year Ended June 30, 2002
	Number of Shares		Exercise Price Per Share		Weighted Average Exercise Price
Options outstanding at beginning of year	4,441,668		$	1.25 - $36.00	$	11.77
Granted	1,818,000		$	0.39 - $0.86	$	0.56
Cancelled	(869,183	)	$	0.39 - $33.38	$	14.48
Exercised	(191,507	)	$	0.39 - $1.50	$	0.98
Options outstanding at end of year	5,198,978		$	0.39 - $36.00	$	7.79
Options exercisable at end of year	3,654,817		$	0.39 - $36.00	$	10.48
Options available for grant at end of year	1,750,294
Weighted average fair value per share of options granted					$	0.26

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The following table summarizes options outstanding and exercisable at June 30, 2004 for options issued under the 1992 Plan and the 2000 Plan:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Options Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
$0.39	644,328	7.47	$	0.39	644,328	$	0.39
$0.44 - $0.86	544,000	7.36	$	0.84	444,000	$	0.84
$1.25 - $1.38	10,400	5.29	$	1.35	10,400	$	1.35
$1.50	849,499	6.14	$	1.50	849,499	$	1.50
$1.56 - $1.89	27,500	7.32	$	1.69	20,833	$	1.62
$2.00	1,404,177	7.90	$	2.00	1,047,262	$	2.00
$2.24 - $7.81	693,750	4.80	$	6.94	693,750	$	6.94
$8.00 - $29.00	572,481	3.63	$	17.76	572,481	$	17.76
$32.25 - $34.50	233,093	2.48	$	32.58	233,093	$	32.58
$36.00	22,500	2.39	$	36.00	22,500	$	36.00
$0.39 - $36.00	5,001,728	6.28	$	5.65	4,538,146	$	6.04

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

401(k) Plan

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

The 401(k) Plan provides that each participant may contribute up to 50% of his or her respective salary, not to exceed the annual statutory limit, except for highly compensated employees, whose contributions are limited to 4%. The Company, at its discretion, may elect to make matching contributions in the form of cash or the Company’s common stock to each participant’s account as determined by the Board of Directors. Under the terms of the 401(k) Plan, the Company may also make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of his or her funds.

Matching contributions to the 401(k) Plan for the years ended June 30, 2004 and 2003 were approximately $1.6 million for each fiscal year. The Company accrued a matching contribution of approximately $1.7 million for the 401(k) Plan year ended December 31, 2000. During fiscal 2002, the Company made the decision not to make this discretionary contribution and reversed the accrual of $1.7 million to income. The Company did not elect to make a discretionary profit sharing contribution in fiscal years 2004, 2003 or 2002.

Employee Stock Ownership Plan

The Company established the Employee Stock Ownership Plan (the “ESOP”) in 1979 and makes related contributions at the discretion of the Board of Directors. No discretionary contributions were made during fiscal 2004, 2003 and 2002. The ESOP held approximately 3.1% and 4.5% of the outstanding common stock of the Company for the benefit of all participants as of June 30, 2004 and 2003, respectively. The ESOP is administered by the ESOP’s Advisory Committee, consisting of certain officers of the Company.

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

(16) Commitments And Contingencies

Medicare Fee Schedule

Prior to April 1, 2002, when the national fee schedule began a five-year phase-in, Medicare used a charge-based reimbursement system for ambulance services and reimbursed 80% of charges determined to be reasonable, subject to the limits fixed for the particular geographic area. The patient was responsible for co-pay amounts, deductibles and the remaining balance, if the Company did not accept the assigned reimbursement, and Medicare required the Company to expend reasonable efforts to collect the balance. In determining reasonable charges, Medicare considered and applied the lowest of various charge factors, including the actual charge, the customary charge, the prevailing charge in the same locality, the amount of reimbursement for comparable services, or the inflation-indexed charge limit.

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

Originally, the Final Rule called for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The national fee schedule was to be phased in at 20-percent increments each year, with payments being made at 100 percent of the national fee schedule in 2006 and thereafter.

With the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, modifications were made to the phase-in of the ambulance fee schedule. Effective July 1, 2004, a regional fee schedule component of reimbursement is being phased in with the original national fee schedule. In addition, the new legislation extended the phase-in period to 2010. Under the new rules, the Medicare allowable reimbursement rate will be the greater of (a) the national fee schedule, or (b) a blend of the national fee schedule and the regional fee schedule. For 2004, that blended rate will be 20% of the national fee schedule and 80% of the regional fee schedule. For each succeeding year through 2007, the percentages will increase 20% for the national fee schedule and decrease 20% for the regional fee schedule portions of the blended rate. For 2008 and 2009, the fee schedule will remain at the 2007 mix of 80% national and 20% regional. In addition to the fee schedule changes, a provision for additional reimbursement for ambulance services was provided to Medicare patients. Among other relief, the Act provides for a 1% increase in reimbursement for urban transports and a 2% increase for rural transports for the remainder of the original phase-in period of the national ambulance fee schedule or through 2006. Although the Company expects this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will benefit the portion of Rural/Metro’s medical transportation revenue that is reimbursed through Medicare, the Company is currently unable to predict the total impact.

Reimbursement by Medicare accounted for 28%, 27%, and 25% of the Company’s net ambulance fee collections for 2004, 2003, and 2002, respectively.

The Company believes the Medicare Ambulance Fee Schedule will have a neutral impact on its medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of its operations. These rules could, however, result in contract renegotiations or other actions by the Company to offset any negative impact at the regional level that could have a material adverse effect on its business, financial condition, results of operations and

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cash flows. Changes in reimbursement policies, or other governmental action, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in our cost structure relative to the rate of increase in the CPI, or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on its business, financial condition, results of operations and cash flows.

Surety Bonds

Certain counties, municipalities, and fire districts require the Company to provide a surety bond or other assurance of financial or performance responsibility. The Company may also be required by law to post a surety bond as a prerequisite to obtaining and maintaining a license to operate. As a result, the Company has surety bonds that are renewable annually. The Company has $9.1 million of surety bonds outstanding as of June 30, 2004.

Operating Leases

The Company leases various facilities and equipment under non-cancelable operating lease agreements. Rental expense charged to operations under these leases (including leases with terms of less than one year) was approximately $11.0 million, $10.7 million and $10.5 million in fiscal 2004, 2003 and 2002, respectively.

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

2005	$	8,224
2006		7,150
2007		5,689
2008		4,282
2009		3,613
Thereafter		14,438
	$	43,396

Indemnifications

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

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

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

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors, and also

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provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties, or in certain other circumstances relating to the sale of securities or their engagement by the Company.

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

Legal Proceedings

From time to time, the Company is subject to litigation and regulatory investigations arising in the ordinary course of business. The Company believes that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the Company is unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of its deductible or self-insured retention arising out of such claims. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation: The Company, Warren S. Rustand, the former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, the former Vice Chairman of the Board, and Robert E. Ramsey, Jr., its former Executive Vice President and former Director, were named as defendants in two purported class action lawsuits: HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V. RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. The two lawsuits, which contained virtually identical allegations, were brought on behalf of a class of persons who purchased the Company’s publicly traded securities including its common stock between April 24, 1997 and June 11, 1998. The complaints alleged that the defendants issued certain false and misleading statements regarding certain aspects of the Company’s financial status and that these statements allegedly caused the Company’s common stock to be traded at artificially inflated prices. The complaints also alleged that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated.

On April 17, 2003, Rural/Metro and the individual defendants agreed to settle the Haskell v. Rural/Metro and Ruble v. Rural/Metro cases with plaintiffs, subject to notice to the class and final court approval. Rural/Metro’s primary and excess carriers funded the settlement on June 5, 2003 by depositing the funds in a designated escrow account and waived any claims for reimbursement of the funds subject to final court approval of the class action settlement. After a hearing on the final settlement agreement, the court entered an order approving the settlement and dismissing the Ruble case without prejudice on December 10, 2003. The Haskell case was dismissed with prejudice on January 13, 2004.

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

Springborn, et al. v. Rural/Metro Corporation, et al.: The Company, Arthur Andersen LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and Jane Doe Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John

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Furman and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO CORPORATION, ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa County, Arizona Superior Court. The lawsuit was brought on behalf of employee firefighters in Maricopa County who participated in the Company’s ESOP, ESPP and/or 401(k) Plan from July 1, 1996 through June 30, 2001. The plaintiffs amended the Complaint on October 17, 2002, adding Barry Landon and Jane Doe Landon as defendants and making certain additional allegations and claims. The primary allegations of the complaint included violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Plans.

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

On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against the Company and its current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal from the court’s July 29, 2003 order to the Ninth Circuit. The appeal was dismissed as premature on October 27, 2003. The court dismissed the plaintiffs’ remaining claims against Arthur Andersen on January 27, 2004, and entered final judgment. On February 10, 2004, the Company and its current directors and officers filed a notion for attorneys’ fees. On February 26, 2004, the plaintiffs appealed the trial courts judgment to the Ninth Circuit. On March 9, 2004, the parties entered into a settlement agreement whereby the plaintiffs agreed to dismiss their appeal of the final judgment, and the Company agreed to withdraw all motions that were pending relating to the lawsuit.

On March 5, 1999, the Company made a voluntary disclosure to the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) concerning questionable billing practices by a subsidiary operating in Pennsylvania. These practices evidently began prior to the January 1997 acquisition of that subsidiary by the Company and continued, to some extent, until December 1998. On October 25, 1999, a lawsuit styled THE UNITED STATES OF AMERICA ex rel. RICHARD S. BUCKMAN V. RURAL METRO CORPORATION AND DONLOCK, LTD., Civil Action No. 3:CV 99-1883, was filed under seal in United States District Court for the Middle District of Pennsylvania. The lawsuit alleged various improper billing practices under the Medicare program, including those practices the Company self-disclosed to the OIG several months earlier. On November 15, 2002, the government elected to intervene in one count concerning the issue the Company self-disclosed to the OIG and declined to intervene in the lawsuit’s remaining counts. The seal was lifted by court order on February 26, 2004. Accrued liabilities at June 30, 2004 and 2003, respectively include a $1.0 million and $0.8 million reserve for this matter. An unfavorable resolution of this lawsuit could have a material adverse effect on the Company business, financial condition, results of operations or cash flows.

Regulatory Compliance

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

The Company has been subject to investigations in the past relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperated fully with the government agencies that conducted these investigations. Those reviews cover periods prior to the Company’s acquisition of certain operations as well as periods subsequent to acquisition. Management believes that the reserves established for specific contingencies which totaled $1.4 million as of June 30, 2004 and 2003, respectively, are sufficient so that the ultimate outcome of these matters would not have a material adverse effect on its business, financial condition, results of operations or cash flows.

Nasdaq Listing

Dating back to May 22, 2003, the Company has had periodic correspondence with the Nasdaq Stock Market (“Nasdaq”) regarding its noncompliance with certain of the Nasdaq SmallCap Market listing standards. Most recently, on July 12, 2004 the Company received notice from the Nasdaq Listing Qualifications Panel that it did not meet the market value of listed securities requirement for continued listing on the Nasdaq SmallCap Market. Effective with the open of business on July 13, 2004, the Company’s common stock began trading on the Over The Counter Bulletin Board. On July 21, 2004, the Company requested the Listing Council to review the Listing Qualification Panel’s decision. The Company is currently awaiting a decision from the Listing Council.

(17) Financial Instruments

The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the

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estimates of fair value. Accordingly, the estimates may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value assumptions.

The carrying values of cash, accounts receivable, accounts payable, accrued liabilities and other liabilities approximate the related fair values due to the short-term maturities of these instruments. The carrying value of notes payable and capital lease obligations approximate the related fair values as rates on these instruments approximate market rates currently available for instruments with similar terms and remaining maturities. The fair value of the Senior Notes was determined by the market price as of June 30, 2004 and 2003. The relationship between the fair value and carrying value of the Senior Notes was then applied to the amount outstanding under the Amended Credit Facility to arrive at its estimated fair value. The fair value of the Company’s Series B Shares was determined by reference to the market price for the Company’s common stock at June 30, 2003. A comparison of the fair value and carrying value of the Senior Notes and Amended Credit Facility is as follows (in thousands):

	As of June 30,
	2004				2003
	Fair Value		Recorded Value		Fair Value		Recorded Value
Credit Facility	$	132,723	$	152,555	$	121,936	$	152,420
Senior Notes		130,416		149,904		119,902		149,878
Series B Redeemable Nonconvertible Participating Preferred Stock		—		—		2,433		7,793

(18) Segment Reporting

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

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

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The accounting policies described in Note 1 to the consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For internal management purposes, the Company’s measure of segment profitability is defined as income (loss) before interest, income taxes, depreciation and amortization. Additionally, segment assets are defined as consisting solely of accounts receivable. The following tables summarize the information required by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) (in thousands):

	Medical Transportation and Related Services		Fire and Other		Total
Year ended June 30, 2004
Net revenues from external customers	$	452,254	$	74,349	$	526,603
Segment profit		53,994		6,991		60,986
Segment assets		64,199		1,149		65,348
Year ended June 30, 2003
Net revenues from external customers	$	411,399	$	73,240	$	484,639
Segment profit		44,997		7,078		52,075
Segment assets		58,782		1,646		60,428
Year ended June 30, 2002
Net revenues from external customers	$	385,995	$	67,156	$	453,151
Segment profit		47,933		5,626		53,559
Segment assets		62,867		1,594		64,461

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

	Years Ended June 30,
	2004			2003			2002
Segment profit	$	60,986		$	52,075		$	53,559
Unallocated corporate overhead		(14,055	)		(17,486	)		(17,776	)
Depreciation and amortization		(11,404	)		(12,587	)		(14,443	)
Interest expense		(29,243	)		(28,012	)		(25,462	)
Interest income		97			197			644
Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle	$	6,381		$	(5,813	)	$	(3,478	)

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

	As of June 30,
	2004		2003		2002
Segment assets	$	65,348	$	60,428	$	64,461
Cash		16,372		12,561		10,677
Inventories		11,738		11,504		12,220
Prepaid expenses and other		8,512		8,498		7,231
Property and equipment, net		40,283		43,010		48,532
Goodwill		41,100		41,167		41,244
Insurance deposits		9,244		6,950		8,228
Other assets		12,644		12,048		8,115
Total assets	$	205,241	$	196,166	$	200,708

(19) Related Party Transactions

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

The Company incurred rental expense of approximately $84,000, $69,000 and $69,000 in fiscal 2004, 2003 and 2002 related to leases of fire and ambulance facilities with a former director of the Company.

The Company incurred consulting fees of approximately $89,000 for each of the fiscal years ended June 30, 2003 and 2002, with a former director of the Company.

Effective January 1, 2004, the Company entered into an employment agreement with an officer, which expires in December 2010. Under the terms of this agreement, the officer was paid a retention bonus of approximately $1.5 million which is subject to repayment should the Company terminate the officer’s employment without cause or should the officer terminate his employment without good reason. The unamortized balance at June 30, 2004 is $1.4 million. This retention bonus is being amortized ratably over the term of the agreement.

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

Not applicable.

ITEM 9A. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures.

The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e). Based upon the foregoing, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in the Company’s internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the Company’s most recent fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. Other Information

None.

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PART III

ITEM 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is incorporated herein by reference to the information contained under the headings “Proposal to Elect Directors - Nominees”, “Code of Ethics”, “Proposal to Elect Directors – Meetings and Committees of the Board of Directors; Independence” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” as set forth in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

Our website (www.shareholder.com/ruralmetro/downloads/Code_of_Business_Conduct.pdf) contains the Company’s Code of Ethics and Business Conduct (“Code of Ethics”), which is the Company’s code of business conduct and ethics for its directors and employees, including the Chief executive officer and Chief Financial Officer. Any amendment to the Code of Ethics will be posted on the Company’s website.

ITEM 11. Executive Compensation

The information required by Item 11 relating to directors of the Company is incorporated herein by reference to the information under the heading “Proposal to Elect Directors - Director Compensation and Other Information” and the information relating to executive officers of the Company is incorporated herein by reference to the information under the heading “Executive Compensation” as set forth in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

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

The information required by Item 12 is incorporated herein by reference to the information under the heading “Security Ownership of Principal Stockholders, Directors and Officers and Related Stockholder Matters” as set forth in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

ITEM 13. Certain Relationships and Related Transactions

The information required by Item 13 is incorporated herein by reference to the information under the heading “Certain Relationships and Related Transactions” as set forth in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

ITEM 14. Principal Registered Public Accounting Firm Fees and Services

The information required by Item 14 is incorporated herein by reference to the information under the heading “Proposal to Elect Directors” as set forth in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

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PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) List of documents filed as a part of this Form 10-K:

  (1) See the Consolidated Financial Statements included in Item 8 hereof.

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(3) Exhibits

Exhibit No.	Description of Exhibit
2	Plan and Agreement of Merger and Reorganization, dated as of April 26, 1993(1)
3.1(a)	Second Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on January 18, 1995; as amended by the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock filed with the Secretary of State of Delaware on August 23, 1995; as amended by the Certificate of Designation, Preferences, and Rights of Series B Preferred Stock filed with the Secretary of State of Delaware on September 26, 2002; as amended by the Certificate of Designation, Preferences, and Rights of Series C Preferred Stock filed with the Secretary of State of Delaware on September 26, 2003; as amended by that Certificate of Amendment filed with the Secretary of State of Delaware on June 15, 2004 *
3.1(b)	Rights Agreement dated as of October 30, 2002 between the Registrant and American Securities Transfer, Inc., the Rights Agent (6)
3.1(c)	Amendment No. 1 to the Rights Agreement dated as of August 23, 1995 between the Registrant and American Securities Transfer, Inc., the Rights Agent (27)
3.1(d)	Amendment No. 2 dated as of September 26, 2003 to the Rights Agreement dated as of August 23, 1995 between the Company and Computershare Trust Company, Inc. (successor to American Securities Transfer, Inc.), the Rights Agent (28)
3.2	Amended and Restated Bylaws of the Registrant (1)
4.1	Specimen Certificate representing shares of Common Stock, par value $.01 per share (1)
4.2	Indenture dated as of March 16, 1998, by and among the Company, the subsidiaries acting as Guarantors thereto, and the First National Bank of Chicago, as Trustee (9)
4.3	Form of Global Note (included in Exhibit 4.2) (9)
4.4	Registration Rights Agreement dated March 11, 1998, by and among Bear Stearns & Co. Inc., Salomon Brothers Inc, SBC Warburg Dillon Reed Inc., First Union Capital Markets, the Company, and certain subsidiaries of the Company, as Guarantors (9)
4.5	Registration Rights Agreement dated as of September 30, 2002 by and among the Company, Special Value Bond Fund II, LLC, GE Capital CFE, Inc., Continental Casualty Company, Cerberus Partners, L.P., Pamco Cayman Ltd., and Pam Capital Funding LP (26)
4.5(a)	Amendment to the Registration Rights Agreement dated as of September 26, 2003 by and among the Company, Tennenbaum & Co., LLC, General Electric Capital Corporation, Highland Crusader Offshore Partners, L.P., Cerberus Partners, L.P., and Pam Capital Funding LP (28)

102

10.3(a)	1989 Employee Stock Option Plan of Registrant, adopted August 10, 1989, as amended (1) **
10.3(b)	Third Amendment to the 1989 Employee Stock Option Plan of Registrant, dated February 4, 1994 (2) **
10.3(c)	Fourth Amendment to 1989 Employee Stock Option Plan, dated August 25, 1994 (3) **
10.4	Form of Stock Option Agreement pursuant to 1989 Employee Stock Option Plan of Registrant (1) *
10.5	Amended and Restated 1992 Stock Option Plan of Registrant, amended through October 15, 1998 (12) *
10.6	Forms of Stock Option Agreements pursuant to the Amended and Restated 1992 Stock Option Plan of Registrant (12)
10.7	2000 Non-Qualified Stock Option Plan, adopted August 11, 2000 (16)
10.15	Forms of Conditional Stock Grant and Repurchase Agreements by and between Registrant and each of its executive officers and directors, dated May 14, 1993, November 1, 1994, and December 1, 1997 (1)
10.16(o)	Form of Change of Control Agreement by and between the Registrant and the following executive officers: (i) Jack E. Brucker, dated April 25, 2002 and (ii) Michael S. Zariello, effective June 2, 2004 (27) **
10.16(p)	Employment Agreement by and between the Registrant and Jack E. Brucker, effective January 1, 2004 (29) **
10.16(q)	Employment Agreement by and between the Registrant and Michael S. Zarriello, effective June 2, 2004 * **
10.17	Form of Indemnity Agreement by and between Registrant and each of its officers and directors, dated in April, May, August and November 1993, as of October 13, 1994, and as of September 25, 1998 (1) **
10.18(a)	Amended and Restated Employee Stock Ownership Plan and Trust of the Registrant, effective July 1, 1997 (12) **
10.21	Retirement Savings Value Plan 401(k) of Registrant, as amended, dated July 1, 1990 (1) **
10.22	Master Lease Agreement by and between Plazamerica, Inc. and the Registrant, dated January 30, 1990 (1)
10.36	Employee Stock Purchase Plan, as amended through November 20, 1997 (21) **
10.37(a)	Loan and Security Agreement by and among the CIT Group/Equipment Financing, Inc. and the Registrant, together with its subsidiaries, dated December 28, 1994, and related Promissory Note and Guaranty Agreement (3)

103

10.37(b)	Form of Loan and Security Agreement by and among Registrant and CIT Group/Equipment Financing, Inc. first dated February 25, 1998 and related form of Guaranty and Schedule of Indebtedness and Collateral (11)
10.45	Amended and Restated Credit Agreement dated as of March 16, 1998, by and among the Company as borrower, certain of its subsidiaries as Guarantors, the lenders referred to therein, and First Union National Bank, as agent and as lender, and related Form of Amended and Restated Revolving Credit Note, Form of Subsidiary Guarantee Agreement, and Form of Intercompany Subordination Agreement (10)
10.55	Provisional Waiver and Standstill Agreement dated as of March 14, 2000 (14)
10.56	First Amendment to Provisional Waiver and Standstill Agreement dated as of April 13, 2000 (14)
10.57	Second Amendment to Provisional Waiver and Standstill Agreement dated as of July 14, 2000 (15)
10.59	Third Amendment to Provisional Waiver and Standstill Agreement dated as of October 16, 2000 (7)
10.60	Fourth Amendment to Provisional Waiver and Standstill Agreement dated as of January 31, 2001 (18)
10.61	Fifth Amendment to Provisional Waiver and Standstill Agreement dated as of April 23, 2001 (19)
10.62	Sixth Amendment to Provisional Waiver and Standstill Agreement dated as of August 1, 2001 (22)
10.63	Seventh Amendment to Provisional Waiver and Standstill Agreement dated as of December 4, 2001 (24)
10.64	Stock Purchase Agreement for the sale of Argentine and related Latin American subsidiaries, effective as of September 27, 2002 (25)
10.65	Stock Purchase Agreement for the sale of our Bolivian subsidiaries, effective as of September 27, 2002 (25)
10.66	Second Amended and Restated Credit Agreement dated as of September 30, 2002 by and among the Company as borrower, certain of its subsidiaries as guarantors, the lenders referred to therein, and Wachovia Bank National Association, as agent, and related Form of Term Note, Form of Subsidiary Guaranty Agreement, and Form of Intercompany Subordination Agreement (26)
10.67	Reaffirmation and First Amendment to Second Amended and Restated Credit Agreement dated as of September 26, 2003 by and among the Company as borrower, certain of its subsidiaries as guarantors, the lenders referred to therein, and Wachovia Bank, National Association, as agent (28)
21	Subsidiaries of Registrant*

104

23.1	Consent of PricewaterhouseCoopers LLP*
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith.

** Management contracts or compensatory plan or arrangement.

(1) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-63448) filed May 27, 1993 and declared effective July 15, 1993.

(2) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-76458) filed March 15, 1994 and declared effective May 5, 1994.

(3) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report filed with the Commission on or about May 12, 1995.

(4) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on or about April 7, 1995, as amended by the Registrant’s Form 8-K/A Current Reports filed on or about May 15, 1995 and August 1, 1995.

(5) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on or about May 19, 1995.

(6) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on or about August 28, 1995.

(7) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report filed with the Commission on or about February 17, 1998.

(8) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on or about April 1, 1998, as amended by the Registrant’s Form 8-K/A Current Report filed on or about June 5, 1998.

(9) Incorporated by reference to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed April 30, 1998 and declared effective on May 14, 1998.

(10) Incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed May 11,1998 and declared effective on May 14, 1998.

(11) Incorporated by reference to the Registrant’s Form 10-K filed with the Commission on or about September 29, 1998.

(12) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report filed with the Commission on or about November 10, 1998.

(13) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the year ended June 30, 1996 filed with the Commission on or about September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)).

(14) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on April 18, 2000.

105

(15) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on July 28, 2000.

(16) Incorporated by reference to the Registrant’s Form S-8 Registration Statement filed with the Commission on October 31, 2000.

(17) Incorporated by reference to the Registrant’s Form 10-Q Current Report filed with the Commission on November 14, 2000.

(18) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on February 2, 2001.

(19) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on May 2, 2001.

(20) Incorporated by reference to the Registrant’s Form 10-Q filed with the Commission on May 15, 2001.

(21) Incorporated by reference to the Registrant’s Form S-8 Registration Statement filed with the Commission on May 22, 2001.

(22) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on August 9, 2001.

(23) Incorporated by reference to the Registrant’s Form 10-Q filed with the Commission on November 14, 2001.

(24) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on January 22, 2002.

(25) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on October 15, 2002.

(26) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on October 16, 2002.

(27) Incorporated by reference to the Registrant’s Form 10-Q filed with the Commission on February 14, 2003.

(28) Incorporated by reference to the Registrant’s Form 8-K Current Report filed with the Commission on October 2, 2003.

(29) Incorporated by reference to the Registrant’s Form 10-Q filed with the Commission on May 14, 2004.

(b) Reports on Form 8-K

  We filed the following reports on Form 8-K during the quarter ended June 30, 2004:

  Current Report on Form 8-K filed on April 19, 2004 under Item 5 (Other Event).

  Current Report on Form 8-K furnished on May 14, 2004 under Item 12 (Results of Operations and Financial Condition).

106

SIGNATURES

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

RURAL/METRO CORPORATION
By:	/s/ Jack E. Brucker
	Jack E. Brucker
	President and Chief Executive Officer

September 27, 2004

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

Signature	Title	Date
/s/ Cor J. Clement Cor J. Clement	Chairman of the Board of Directors	September 27, 2004
/s/ Louis G. Jekel Louis G. Jekel	Vice Chairman of the Board of Directors	September27, 2004
/s/ Jack E. Brucker Jack E. Brucker	President, Chief Executive Officer and Director (Principal Executive Officer)	September 27, 2004
/s/ Michael S. Zarriello Michael S. Zarriello	Senior Vice President, Secretary and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	September 27, 2004
/s/ Mary Anne Carpenter Mary Anne Carpenter	Director	September 27, 2004
/s/ William C. Turner William C. Turner	Director	September 27, 2004
/s/ Henry G. Walker Henry G. Walker	Director	September 27, 2004
/s/ Robert E. Wilson Robert E. Wilson	Director	September 27, 2004

107

EX-3.1(A)

Exhibit 3.1(a)

SECOND RESTATED CERTIFICATE OF INCORPORATION

OF

RURAL/METRO CORPORATION

1. The name of the corporation (which is hereinafter referred to as the “Corporation”) is RURAL/METRO CORPORATION.

2. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on April 26, 1993, under the name RURAL/METRO CORPORATION, and a Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 21, 1993.

3. This Second Restated Certificate of Incorporation has been duly proposed by resolutions adopted and declared advisable by the Board of Directors of the Corporation, duly adopted by the stockholders of the Corporation at a meeting duly called, and duly executed and acknowledged by the officers of the Corporation in accordance with the provisions of Sections 103 and 245 of the General Corporation Law of the State of Delaware and, restates and integrates the provisions of the Restated Certificate of Incorporation of the Corporation and, upon filing with the Secretary of State in accordance with Section 103, shall thenceforth supersede the Restated Certificate of Incorporation and all amendments thereto, and shall, as it may thereafter be amended in accordance with its terms and applicable law, be the Certificate of Incorporation of the Corporation.

4. The text of the Restated Certificate of Incorporation of the Corporation is hereby restated to read in its entirety as follows:

ARTICLE I

Name

The name of the Corporation is: Rural/Metro Corporation

ARTICLE II

Registered Office

The address of the registered office of the Corporation in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801, and the name of the Corporation’s registered agent at that address is The Corporation Trust Company.

ARTICLE III

Business

The purposes of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (the “GCL”).

ARTICLE IV

Authorized Capital Stock

The total number of shares of stock that the Corporation shall have the authority to issue is Twenty-five million (25,000,000), consisting of Twenty-three million (23,000,000) shares of Common Stock, par value $.01 per share (“Common Stock”) and Two million (2,000,000) shares of Preferred Stock, par value $.01 per share (“Preferred Stock”).

The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the “Board”) is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the GCL (hereinafter referred to as “Preferred Stock Designation”), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following:

A. the designation of the series, which may be by distinguishing number, letter or title;

B. the number of shares of the series, which number the Board may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding);

C. whether dividends, if any, shall be cumulative or noncumulative and the rights with respect to dividends of the series;

D. dates at which dividends, if any, shall be payable;

E. the redemption rights and price or prices, if any, for shares of the series;

F. the terms and amount of any sinking fund provided for the purchase or redemption of shares of the series;

G. the amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation;

H. whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the

specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible and all other terms and conditions upon which such conversion may be made;

I. restrictions on the issuance of shares of the same series or of any other class or series; and

J. the voting rights, if any, of the holders of shares of the series.

The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. The holders of shares of Common Stock shall be entitled to one (1) vote for each such share upon all questions presented generally to the stockholders.

The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law.

ARTICLE V

Election of Directors

A. The business and affairs of the Corporation shall be conducted and managed by, or under the direction of, the Board. Subject to any rights to elect directors set forth in any Preferred Stock Designation, the total number of directors constituting the entire Board shall be not less than one (1) nor more than fifteen (15), with the then-designated number of directors being fixed from time to time by or pursuant to a resolution passed by the Board. Members of the Board shall hold office until their successors are elected and qualified or until their earlier death, resignation, disqualification or removal.

B. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.

C. Except as otherwise provided for or fixed pursuant to the provisions of Article IV of this Restated Certificate of Incorporation relating to the rights of the holders of any series of Preferred Stock to elect additional directors, and subject to the provisions hereof, newly created directorships resulting from any increase in the authorized number of directors, and any vacancies on the Board resulting from death, resignation, disqualification, removal, or other cause, may be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director.

D. During any period when the holders of any series of Preferred Stock have the right to elect additional directors as provided for or fixed pursuant to the provisions of Article IV of this Second Restated Certificate of Incorporation, then upon commencement and for the duration of the period during which such right continues (1) the then otherwise total designated number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors

so provided for or fixed pursuant to said provisions, and (2) each such additional director shall serve until such director’s successor shall have been duly elected and qualified, or until such director’s right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his or her earlier death, disqualification, resignation or removal. Except as otherwise provided by the Board in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate and the total designated number of directors of the Corporation shall be reduced accordingly.

E. Except for such additional directors, if any, as are elected by the holders of any series of Preferred Stock as provided for or fixed pursuant to the provisions of Article IV of this Second Restated Certificate of Incorporation, any director may be removed from office with or without cause only by: (1) the affirmative vote of sixty six and two-thirds percent (66 2/3%) or more of the combined voting power of the then issued and outstanding shares of capital stock of the Corporation entitled to vote in the election of directors, voting together as a single class; or (2) the affirmative vote of sixty six and two-thirds percent (66 2/3%) or more of the then serving directors of the Corporation.

ARTICLE VI

Meetings of Stockholders

A. Meetings of stockholders of the Corporation may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. Except as otherwise provided for or fixed pursuant to the provisions of Article IV of this Second Restated Certificate of Incorporation relating to the rights of the holders of any series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, or the Board pursuant to a resolution adopted by the Board. Special meetings of stockholders may not be called by any other person or persons or in any other manner.

B. In addition to the powers conferred on the Board by this Second Restated Certificate of Incorporation and by the GCL, and without limiting the generality thereof, the Board is specifically authorized from time to time, by resolution of the Board without additional authorization by the stockholders of the Corporation, to adopt, amend or repeal the Bylaws of the Corporation, in such form and with such terms as the Board may determine, including, without limiting the generality of the foregoing, Bylaws relating to: (1) regulation of the procedure for submission by stockholders of nominations of persons to be elected to the Board; (2) regulation of the attendance at annual or special meetings of the stockholders of persons other than holders of record or their proxies; and (3) regulation of the business that may properly be brought by a stockholder of the Corporation before an annual or special meeting of stockholders of the Corporation.

ARTICLE VII

Stockholder Consent

No action that is required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders may be effected by written consent of stockholders in lieu of a meeting of stockholders, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by the Board.

ARTICLE VIII

Limitation of Liability

A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the GCL.

Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification.

ARTICLE IX

Business Combinations; Fair Price

A. In addition to any affirmative vote required by law or this Second Restated Certificate of Incorporation, and except as otherwise expressly provided in paragraph B of this Article IX:

1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined), or (b) any other corporation, partnership or other entity (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder other than a merger enacted in accordance with Section 253 of the GCL or any successor thereof; or

2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, including all Affiliates of the Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of ten million dollars ($10,000,000) or more; or

3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder, including all Affiliates of the Interested Stockholder, in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of ten million dollars ($10,000,000) or more (other than on a pro rata basis to all holders of Voting

Stock of the same class held by the Interested Stockholder pursuant to a stock split, stock dividend or distribution of warrants or rights and other than in connection with the exercise or conversion of securities exercisable for or convertible into securities of the Corporation of any of its subsidiaries which securities have been distributed pro rata to all holders of Voting Stock); or

4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliates of an Interested Stockholder; or

5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not an Interested Stockholder is a party thereto) which has the effect, directly or indirectly, of increasing the proportionate share by more than one percent (1%) of the issued and outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which are directly or indirectly owned by any Interested Stockholder or one or more Affiliates of the Interested Stockholder;

shall require the affirmative vote of the holders of at least sixty six and two-thirds percent (66 ²/3%) of the voting power of the then issued and outstanding Voting Stock, as hereinafter defined, voting together as a single class, including the affirmative vote of the holders of at least sixty six and two-thirds percent (66 ²/3%) of the voting power of the then issued and outstanding Voting Stock not Beneficially Owned directly or indirectly by an Interested Stockholder or any Affiliate of any Interested Stockholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be permitted, by law or in any agreement with any national securities exchange or otherwise.

B. The provisions of Section A of this Article IX shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law or any other provision of this Second Restated Certificate of Incorporation, if the conditions specified in either of the following paragraph 1 or 2 are met:

1. the Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined); or

2. all of the following price and procedural conditions shall have been met:

(a) the aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash, to be received per share by the holders of Common Stock in such Business Combination, shall be at least equal to the highest of the following:

(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it (A) within the two (2) year period immediately prior to the first public announcement of the proposal of such Business Combination (the

“Announcement Date”), or (B) in the transaction in which it became an Interested Stockholder, whichever is higher;

(ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the “Determination Date”), whichever is higher; and

(iii) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph 2(a)(ii) above, multiplied by the ratio of (A) the highest per share (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it within the two (2) year period immediately prior to the Announcement Date to (B) the Fair Market Value per share of Common Stock on the first day in such two (2) year period upon which the Interested Stockholder acquired any shares of Common Stock; and

(b) the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class, other than Common Stock or Excluded Preferred Stock, of issued and outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph 2(b) shall be required to be met with respect to every such class of issued and outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock):

(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (A) within the two (2) year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Stockholder, whichever is higher;

(ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock arc entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

(iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and

(iv) (if applicable) the price per share equal to the Fair Market Value per share of such class of Voting Stock determined pursuant to paragraph 2(b)(iii) above, multiplied by the ratio of (A) the highest per

share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two (2) year period immediately prior to the Announcement Date to (B) the Fair Market Value per share of such class of Voting Stock on the first day in such two (2) year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock; and

(c) the consideration to be received by holders of a particular class of issued and outstanding Voting Stock (including Common Stock and other than Excluded Preferred Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock (if the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it); and

(d) after such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any issued and outstanding preferred stock, except as approved by a majority of the Continuing Directors; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends as necessary fully to reflect any recapitalization (including any reverse stock split), reorganization or any similar reorganization which has the effect of reducing the number of issued and outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (iv) such Interested Stockholder shall not have become the Beneficial Owner of any additional Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder; and

(e) after such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and

(f) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to shareholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be marked pursuant to such Act or subsequent provisions).

C. For purposes of this Article IX the following terms shall have the following meanings:

1. “Affiliate” or “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on May 19, 1993.

2. “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act of 1934, as in effect on May 19, 1993. In addition, a Person shall be the “Beneficial Owner” of any Voting Stock which such Person or any of its Affiliates or Associates has: (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (b) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the Beneficial Owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of the stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such Person nor any such Affiliate of Associate is otherwise deemed the Beneficial Owner).

3. “Business Combination” shall mean any transaction described in any one or more of clauses (1) through (5) of Section A of this Article IX.

4. “Continuing Director” shall mean any member of the Board who is unaffiliated with and is not the Interested Stockholder and was a member of the Board prior to the lime that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the Board or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Continuing Directors then on the Board.

5. “Excluded Preferred Stock” means any series of Preferred Stock with respect to which a majority of the Continuing Directors have approved a Preferred Stock Designation creating such series that expressly provides that the provisions of this Article IX shall not apply.

6. “Fair Market Value” shall mean: (a) in the case of stock, the highest closing sale price during the thirty (30) day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange listed stocks, or, if such stock is

not quoted on the composite tape, on the New York Stock Exchange, or, if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty (30) day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use in its stead, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in accordance with Section D of this Article IX; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in accordance with Section D of this Article IX.

7. “Interested Stockholder” shall mean any Person to or which:

(a) itself, or along with its Affiliates, is the Beneficial Owner, directly or indirectly, of more than fifteen percent (15%) of the then issued and outstanding Voting Stock; or

(b) is an Affiliate of the Corporation and at any time within the two (2) year period immediately prior to the date in question was itself, or along with its Affiliates, the Beneficial Owner, directly or indirectly, of fifteen percent (15%) or more of the then issued and outstanding Voting Stock; or

(c) is an assignee of or has otherwise succeeded to any Voting Stock which was at any time within the two (2) year period immediately prior to the date in question beneficially owned by an Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

For the purpose of determining whether a Person is an Interested Stockholder pursuant to paragraph 7 of this Section C, the number of shares of Voting Stock deemed to be issued and outstanding shall include shares deemed owned through application of paragraph 2 of this Section C but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise.

Notwithstanding anything to the contrary contained in this Second Restated Certificate of Incorporation, for purposes of this Second Restated Certificate of Incorporation, the term “Interested Stockholder” shall not, for any purpose, include, and the provisions of Article IX(A) hereof shall not apply to: (a) the Corporation or any Subsidiary; or (b) any employee stock ownership plan of the Corporation or any Subsidiary.

8. In the event of any Business Combination in which the Corporation survives, the phrase “other consideration to be received” as used in paragraphs 2(a) and (b) and paragraph B of this Article IX shall include the shares of Common Stock and/or the shares of any other class of issued and outstanding Voting Stock retained by the holders of such shares.

9. “Person” shall mean any individual, firm, corporation, partnership or other entity.

10. “Subsidiary” shall mean any corporation or other entity of which the Corporation owns, directly or indirectly, securities that enable the Corporation to elect a majority of the board of directors or other persons performing similar functions of such corporation or entity or that otherwise give to the Corporation the power to control such corporation or entity.

11. “Voting Stock” means all issued and outstanding shares of capital stock of the Corporation that pursuant to or in accordance with this Second Restated Certificate of Incorporation are entitled to vote generally in the election of directors of the Corporation, and each reference herein, where appropriate, to a percentage or portion of shares of Voting Stuck shall refer to such percentage or portion of the voting power of such shares entitled to vote. The issued and outstanding shares of Voting Stock shall not include any shares of Voting Stock that may be issuable pursuant to any agreement, or upon the exercise or conversion of any rights, warrants or options or otherwise.

D. The Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article IX, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article IX, including, without limitation: (i) whether a Person is an Interested Stockholder; (ii) the number of shares of Voting Stock beneficially owned by any Person; (iii) whether a Person is an Affiliate or Associate of another; (iv) whether the applicable conditions set forth in paragraph 2 of paragraph B of this Article IX have been met with respect to any Business Combination; (v) the Fair Market Value of stock or other property in accordance with paragraph 6 of paragraph C of this Article IX; and (vi) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of ten million dollars ($10,000,000) or more.

E. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article IX shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law.

ARTICLE X

Amendment of Corporate Documents

A. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of this Second Restated Certificate of Incorporation, any alteration, amendment, repeal or rescission (a “Change”) of any provision of this Second Restated Certificate of Incorporation must be approved by at least a majority of the then serving directors and by the affirmative vote of the holders of at least a majority of the combined voting power of the issued and outstanding shares of Voting Stock, voting together as a single class; provided, however, that if any such Change relates to Articles IV, V, VI, VII, VIII, IX, XI or XII hereof or to this Article X, such Change must also be approved by the affirmative vote of the holders of at least sixty six and

two-thirds percent (66 2/3%) of the combined voting power of the issued and outstanding shares of Voting Stock, voting together as a single class.

Subject to the provisions hereof, the Corporation reserves the right at any time, and from time to time, to amend, alter, repeal or rescind any provision contained in this Second Restated Certificate of Incorporation in the manner now or hereafter prescribed by law, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereinafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Second Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article X.

B. In addition to any affirmative vote required by law, any Change of the Bylaws of the Corporation may be adopted either: (i) by the Board; or (ii) by the stockholders by the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the combined voting power of the issued and outstanding shares of Voting Stock, voting together as a single class.

ARTICLE XI

Board Considerations Upon Significant Events

The Board, when evaluating any (A) tender offer or invitation for tenders, or proposal to make a tender offer or request or invitation for tenders, by another party, for any equity security of the Corporation, or (B) proposal or offer by another party to (1) merge or consolidate the Corporation or any subsidiary with another corporation or other entity, (2) purchase or otherwise acquire all or a substantial portion of the properties or assets of the Corporation or any subsidiary, or sell or otherwise dispose of to the Corporation or any subsidiary all or a substantial portion of the properties or assets of such other party, or (3) liquidate, dissolve, reclassify the securities of, declare an extraordinary dividend of, recapitalized or reorganize the Corporation, shall take into account all factors that the Board deems relevant, including, without limitation, to the extent so deemed relevant, the potential impact on employees, customers, suppliers, partners, joint venturers and other constituents of the Corporation and the communities in which the Corporation operates.

ARTICLE XII

Structure of Board of Directors

A. The Board (other than those directors elected by the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV hereof (“Preferred Stock Directors”) shall be divided into three classes, as nearly equal in number as possible, designated Class I, Class II and Class III. Class I directors shall initially serve until the 1995 meeting of stockholders; Class II directors shall initially serve until the 1996 meeting of stockholders; and Class III directors shall initially serve until the 1997 meeting of stockholders. Commencing with the annual meeting of stockholders in 1995, directors of each class, the term of which shall then expire, shall be elected to hold office for a three-year term and until the election and qualification of their respective successors in office. In case of any increase or decrease, from

time to time, in the number of directors (other than Preferred Stock Directors), the number of directors in each class shall be apportioned as nearly equal as possible.

B. Any director chosen to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor shall be elected and qualified or until their earlier death, resignation, disqualification or removal.

IN WITNESS WHEREOF, this Second Restated Certificate of Incorporation has been signed this 17^th day of January, 1995.

RURAL/METRO CORPORATION
By:	/s/    ROBERT H. MANSCHOT
	President

[SEAL]

Attest:

/s/    LOUIS G. JEKEL        

Secretary

CERTIFICATE OF AMENDMENT

OF

SECOND RESTATED CERTIFICATE OF INCORPORATION

RURAL/METRO CORPORATION

Rural/Metro Corporation (“Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said Corporation, at a meeting duly held March 11, 2004, adopted a resolution proposing and declaring advisable the following amendment to the Second Restated Certificate of Incorporation of said Corporation:

RESOLVED, that the Second Restated Certificate of Incorporation of Rural/Metro Corporation be amended by changing the first paragraph of Article IV thereof so that, as amended, the first paragraph of said Article IV shall be and read as follows:

“The total number of shares of stock that the Corporation shall have the authority to issue is forty-two million (42,000,000), consisting of forty million (40,000,000) shares of Common Stock, par value $.01 per share (“Common Stock”) and two million (2,000,000) shares of Preferred Stock, par value $.01 per share (“Preferred Stock”).”

SECOND: That thereafter, pursuant to resolution of its Board of Directors, an annual meeting of the stockholders of said Corporation was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the aforesaid amendment.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said Rural/Metro Corporation has caused this Certificate to be signed by Michael S. Zarriello its Chief Financial Officer , this 15 day of June, 2004.

RURAL/METRO CORPORATION,
a Delaware corporation
	/s/ Michael S. Zarriello
By:	Michael S. Zarriello
Its:	Senior Vice President and Chief Financial Officer

CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS

OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

OF

RURAL/METRO CORPORATION

Pursuant to Section 151 of the General Corporation Law of the State of Delaware

The undersigned officers of Rural/Metro Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 151 thereof, DO HEREBY CERTIFY:

That pursuant to the authority conferred upon the Board of Directors by the Second Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on August 10, 1995, adopted the following resolution creating a series of 15,000 shares of Preferred Stock designated as Series A Junior Participating Preferred Stock:

RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Second Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows:

Section 1. Designation and Amount. The shares of such series shall be designated as “Series A Junior Participating Preferred Stock” and the number of shares constituting such series shall be 15,000.

Section 2. Dividends and Distributions.

(A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $0.01 per share, of the Corporation (the “Common Stock”) since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after August

10, 1995 (the “Rights Declaration Date”) (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it. declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock).

(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

Section 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:

(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

(C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a “default period”) which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and f or the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors.

(ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.

(iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C) (iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after

such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C) (iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders.

(iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C) (ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence.

(v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C) (ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors.

(D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

Section 4. Certain Restrictions.

(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;

(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares, of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock;

(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(B) The Corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

Section 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

Section 6. Liquidation, Dissolution or Winding Up.

(A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received 1,000 times the exercise price per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as

appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 7. Consolidation, Merger, etc. In case the corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any Dividend Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 8. No Redemption. The shares of Series A Junior Participating Preferred Stock shall not be redeemable.

Section 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation’s Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

Section 10. Amendment. The Second Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class

Section 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders’ fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.

IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 21^st day of August, 1995.

RURAL/METRO CORPORATION
	/s/    JAMES H. BOLIN
Name:	James H. Bolin
Title:	President

Attest:
By:	/s/    STEVEN M. LEE
Name:	Steven M. Lee
Title:

CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS

OF SERIES B PREFERRED STOCK

of

RURAL/METRO CORPORATION

Pursuant to Section 151 of the General Corporation Law of the State of Delaware Rural/Metro Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 151 thereof, does hereby certify that pursuant to the authority conferred upon the Board of Directors by the Second Restated Certificate of Incorporation of the Corporation, the said Board of Directors on September 25, 2002, adopted the following resolution creating three new series of Preferred Stock, par value $.01 per share, designated as Series B-1 Voting Preferred Stock, Series B-2 Non-Voting Preferred Stock and Series B-3 Preferred Stock:

RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Second Restated Certificate of Incorporation, three series of Preferred Stock of the Corporation be and hereby are created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, are as follows:

Section 1. Designation and Amount. 211,549 shares shall be designated as “Series B-1 Voting Preferred Stock”, 211,549 shares shall be designated as “Series B-2 Non-Voting Preferred Stock” and 211,549 shares shall be designated as “Series B-3 Preferred Stock” (the Series B-1 Voting Preferred Stock, Series B-2 Non-Voting Preferred Stock and Series B-3 Preferred Stock are collectively referred to herein as the “Series B Preferred Stock”). The total number of shares of Series B Preferred Stock the Corporation shall have the authority to issue is 634,647.

Section 2. Dividends and Distributions.

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(a) The holders of shares of Series B Preferred Stock shall be entitled to receive dividends payable out of funds legally available therefor. Such dividends shall be payable only when, as, and if declared by the Board of Directors and shall be noncumulative.

(b) No dividends shall be paid on any Common Stock of the Corporation, par value $.01 per share (the “Common Stock”), unless a dividend (including the amount of any dividends paid pursuant to the above provisions of this section) is paid with respect to all outstanding shares of Series B Preferred Stock in an amount for each such share of Series B Preferred Stock equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Series B Preferred Stock could then be converted.

(c) The Board of Directors may fix a record date for the determination of holders of shares of Series B Preferred Stock entitled to receive payment of a dividend or distribution declared

thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

Section 3. Voting Rights.

(a) Series B-1 Voting Preferred Stock. Each share of Series B-1 Voting Preferred Stock shall entitle the holder thereof to that number of votes equal to the number of shares of Common Stock into which one share of Series B-1 Voting Preferred Stock would then be converted if automatically converted pursuant to Section 8(a) hereof, regardless of whether there were sufficient shares of Common Stock authorized for such conversion, and shall entitle the holder to vote on all matters submitted to a vote of the stockholders of the Corporation. Except as otherwise provided herein or by law, the holders of shares of Series B-1 Voting Preferred Stock, the holders of shares of Series B-3 Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of the stockholders of the Corporation.

(b) Series B-2 Non-Voting Preferred Stock. Except as set forth herein or as otherwise required by law, holders of outstanding shares of the Series B-2 Non-Voting Preferred Stock shall not be entitled to vote on any matter on which the stockholders of the Corporation shall be entitled to vote, and shares of the Series B-2 Non-Voting Preferred Stock shall not be included in determining the number of shares voting or entitled to vote on any such matters; provided, however, that notwithstanding the foregoing, holders of shares of Series B-2 Non-Voting Preferred Stock shall be entitled to vote on any amendment to this Section 3 and on any amendment, repeal or modification of any provision of the Second Restated Certificate of Incorporation of the Corporation that adversely affects the powers, preferences or special rights of the Series B-2 Non-Voting Preferred Stock.

(c) Series B-3 Preferred Stock. Each share of Series B-3 Preferred Stock shall entitle the holder thereof to that number of votes equal to the number of shares of Common Stock into which one share of Series B-3 Preferred Stock would then be converted if automatically converted pursuant to Section 8(a) hereof, regardless of whether there were sufficient shares of Common Stock authorized for such conversion, and shall entitle the holder to vote on all matters submitted to a vote of the stockholders of the Corporation; provided, however, that such number of votes shall automatically be voted, whether at a stockholder meeting or pursuant to an action by written consent, in accordance with the majority of the stockholders of the Corporation, or, if no such majority is obtained, then such votes shall be voted in accordance with the vote of the Board of Directors. Except as otherwise provided herein or by law, the holders of shares of Series B-3 Preferred Stock, the holders of shares of Series B-1 Voting Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of the stockholders of the Corporation.

Section 4. Certain Restrictions.

(a) So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not, without the vote or written consent by the holders of at least a majority of the then outstanding shares of the Series B-1 Voting Preferred Stock, Series B-2 Non-Voting Preferred Stock and Series B-3 Preferred Stock, voting as one class:

(i) declare or pay dividends on, make any other distributions on, or redeem, purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock;

(ii) purchase or otherwise acquire for consideration (or pay into or set aside for a sinking fund for such purpose) any shares of Series B Preferred Stock, except in accordance with Section 7;

(iii) authorize, issue or obligate itself to issue shares of any equity security, including securities exercisable into equity securities, which rank senior to or on a parity with the Series B Preferred Stock with respect to rights to receive distributions upon liquidation, with respect to dividends or with respect to redemption or in any other manner;

(iv) increase or decrease the number of authorized shares of Series B-1 Voting Preferred Stock, the Series B-2 Non-Voting Preferred Stock or the Series B-3 Preferred Stock;

(v) redeem, purchase, or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any of the Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares at cost or at cost plus interest upon the occurrence of certain events, such as the termination of employment; or

(vi) amend, alter or repeal any provision of its Second Restated Certificate of Incorporation, by-laws, or the resolution providing for the issuance of the Series B Preferred Stock, or pass any stockholder resolutions, including such action effected by merger or similar transaction in which the Corporation is the surviving corporation, if such amendment or resolution would change any of the rights, preferences or privileges provided for herein for the benefit of any shares of the Series B Preferred Stock.

(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

Section 5. Reacquired Shares. Any shares of Series B Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

Section 6. Liquidation, Dissolution or Winding Up.

(a) Upon the commencement of any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock unless, prior and in preference thereto, the holders of shares of Series B

Preferred Stock shall have received their pro rata share of the greater of (i) the amount of money or other consideration to which all of the holders of the Series B Preferred Stock would have been entitled had the Series B Preferred Stock been converted in accordance with Section 8, regardless of whether there were sufficient shares of Common Stock authorized for such conversion, or (ii) if such distribution is to be received by the holders of the Series B Preferred Stock before January 31, 2003, then $10,000,000, if such distribution is to be received by the holders of the Series B Preferred Stock during the period from January 31, 2003 to and including December 31, 2003, then $12,500,000 and if such distribution is to be received by the holders of the Series B Preferred Stock at any time thereafter, then $15,000,000, plus, in the case of both clause (i) and clause (ii), all accrued or declared but unpaid dividends on the Series B Preferred Stock (the “Series B Liquidation Preference”).

(b) In the event that there are not sufficient assets available to permit payment in full of the Series B Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series B Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences.

(c) For purposes of this Section 6, (i) any acquisition of the Corporation by means of merger, consolidation or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (other than a mere reincorporation transaction), (ii) any acquisition by any person or group of persons acting in concert of more than 50% of the voting control of the Corporation, or (iii) a sale of all or substantially all of the assets of the Corporation, shall be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the holders of Series B Preferred Stock to receive at the closing the amount set forth in Section 6(a); provided, however, that the holders of a majority of the Series B Preferred Stock may determine that the occurrence of any event described in this Section 6(c) shall not be deemed a liquidation, dissolution or winding up of the Corporation.

(d) Written notice of any liquidation, dissolution or winding up of the Corporation (including pursuant to paragraph (c) of this Section 6 stating the payment date or dates and the place where the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than 30 days prior to any payment date stated therein, to the holders of record of the shares of Series B Preferred Stock at their address as the same shall appear in the records of the Corporation.

Section 7. Redemption.

(a) Mandatory Redemption. The Corporation shall redeem all outstanding shares of Series B Preferred Stock on December 31, 2004 (the “Mandatory Redemption Date”). All shares of Series B Preferred Stock to be redeemed shall be redeemed by paying to each holder of Series B Preferred Stock its pro rata share of an aggregate amount equal to the greater of (i) $15,000,000, plus accrued dividends, if any, on the Series B Preferred Stock, or (ii) the value of the Common Stock then issuable upon conversion of the Series B Preferred Stock, based on the average closing price of the Common Stock as reported in the Wall Street Journal for the twenty (20) consecutive trading days prior to December 24, 2004 (the “Trading Value”). If the capital of the Corporation

on the Mandatory Redemption Date is insufficient under applicable law to redeem the total number of outstanding shares of Series B Preferred Stock to be redeemed on the Mandatory Redemption Date, the holders of shares of Series B Preferred Stock shall share ratably in any payment legally available for redemption of such shares on the Mandatory Redemption Date according to the respective amounts which would be payable with respect to the full number of shares owned by such holders if all such outstanding shares were redeemed in full prior to any payments to the holders of Series B Preferred Stock, and any shares of Series B Preferred Stock not so redeemed shall remain issued and outstanding, with all rights and preferences applicable thereto, until such time as such Series B Preferred Stock is redeemed by the Corporation pursuant to this Section 7. At any time thereafter when the capital of the Corporation is sufficient under applicable law to redeem such shares of Series B Preferred Stock, the Corporation shall make such payments as are legally available for redemption of such shares to redeem the balance of such shares of Series B Preferred Stock, or such portion thereof for which capital is then legally sufficient, on the basis set forth above.

(b) Redemption Mechanics.

(i) At least 10 days but not more than 30 days prior to the Mandatory Redemption Date, written notice (the “Redemption Notice”) shall be given by the Corporation by mail, postage prepaid, or by facsimile transmission to non-U.S. residents, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series B Preferred Stock, notifying such holder of the redemption and specifying the number of shares of Series B Preferred Stock to be redeemed, the Series B Liquidation Preference, the pro rata portion of the Series B Liquidation Preference per share of Series B Preferred Stock, the number of outstanding shares of Series B Preferred Stock, the Mandatory Redemption Date and the place where said Series B Liquidation Preference or Trading Value, as the case may be, shall be payable. The Redemption Notice shall be addressed to each holder at his or her or its address as shown by the records of the Corporation. On the Mandatory Redemption Date, the Corporation shall be obligated to redeem all of the issued and outstanding shares of Series B Preferred Stock and all funds necessary for such redemption shall be set aside by the Corporation.

(ii) On or before the Mandatory Redemption Date, the Corporation shall deposit the amount of the Series B Liquidation Preference as of December 24, 2004, or the Trading Value, whichever amount is greater, with a nationally recognized bank or trust company with $100,000,000 or more of tangible net assets having an office in the City of New York, designated in the Redemption Notice, irrevocably in trust for the benefit of the holders of Series B Preferred Stock and thereafter each share of Series B Preferred Stock shall be deemed to have been redeemed on the Mandatory Redemption Date, whether or not the certificate for such share of Series B Preferred Stock shall be surrendered for redemption and canceled. Upon surrender to the Corporation by the holder of such share of Series B Preferred Stock of the certificate representing such Series B Preferred Stock, the Corporation shall immediately pay the applicable pro rata portion of the Series B Liquidation Preference or the Trading Value, as the case may be, to such holder. In the event that the capital of the Corporation is insufficient under applicable law to redeem the total number of outstanding shares of Series B Preferred Stock pursuant to Section 7(a) on the Mandatory Redemption Date, the Corporation shall deposit, irrevocably in trust for the

benefit of the holders of Series B Preferred Stock, such amount as is legally available for redemption of such shares on the Mandatory Redemption Date.

Section 8. Conversion.

(a) Forced Conversion. The Corporation shall have the right, exercisable at any time prior to December 31, 2004 and upon at least 10 days but not more than 30 days prior written notice (the “Conversion Notice”), to cause all, but not less than all, of the then outstanding shares of Series B Preferred Stock to be converted into such number of fully paid and nonassessable shares of the Common Stock of the Corporation as is obtained by multiplying the number of shares of Series B Preferred Stock to be so converted by the quotient, the numerator of which is ten multiplied by $2.55 (the “Original Price”) and the denominator of which is the Series B Preferred Stock Conversion Price as last adjusted and in effect at the date any share or shares of Series B Preferred Stock are surrendered for conversion.

(b) Series B Preferred Stock Conversion Price.

(i) The initial “Series B Preferred Stock Conversion Price” shall be the Original Price. In order to prevent dilution of the conversion rights granted under this Section 8, the Series B Preferred Stock Conversion Price will be subject to adjustment from time to time pursuant to this Section 8(b).

(ii) Except as provided below, if and whenever the Corporation shall issue or sell, or in accordance with Section 8(b)(vi) is deemed to have issued or sold, any shares of its Common Stock without consideration or for a consideration per share less than the Fair Market Value on the date of such issuance or sale, then the Series B Preferred Stock Conversion Price shall be determined by multiplying (A) the Series B Preferred Stock Conversion Price in effect on the day immediately prior to such date by (B) a fraction, the numerator of which shall be the sum of (1) the number of shares of Common Stock Deemed Outstanding immediately prior to such sale or issuance and (2) the number of shares of Common Stock calculated by dividing the aggregate consideration receivable by the Corporation for the total number of shares of Common Stock so issued (or into or for which the rights, options, warrants or other securities are convertible, exercisable or exchangeable) by the Fair Market Value, and the denominator of which shall be the sum of (x) the total number of shares of Common Stock Deemed Outstanding immediately prior to such sale or issue and (y) the number of additional shares of Common Stock issued (or into or for which the rights, options, warrants or other securities may be converted, exercised or exchanged). In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such noncash consideration shall be utilized in the foregoing computation. Such fair market value shall be determined in good faith by the Board of Directors.

(iii) If the Corporation at any time subdivides (by any stock split, stock split-up, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of its Common Stock into a greater number of shares, the Series B Preferred Stock Conversion Price in effect immediately prior to such subdivision will be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of its Common Stock, the Series B Preferred Stock Conversion Price in effect immediately prior to such combination will be proportionately increased.

(iv) If the Corporation at any time subdivides (by any stock split, stock split-up; stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of its Series B Preferred Stock into a greater number of shares, the Series B Preferred Stock Conversion Price in effect immediately prior to such subdivision will be proportionately increased, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of its Series B Preferred Stock, the Series B Preferred Stock Conversion Price in effect immediately prior to such combination will be proportionately reduced.

(v) In case the Corporation shall declare a dividend or make any distribution upon any stock of the Corporation payable in Common Stock or Options or Convertible Securities (as defined in subsection (vi) below) to purchase Common Stock without making a ratable distribution thereof to holders of Series B Preferred Stock (based upon the number of shares of Common Stock into which such Series B Preferred Stock would be convertible, assuming conversion), then the Series B Preferred Stock Conversion Price in effect immediately prior to the declaration of such dividend or distribution shall be reduced to the quotient obtained by dividing (1) the product of (x) the Common Stock Deemed Outstanding immediately prior to such declaration and (y) the then effective Series B Preferred Stock Conversion Price, by (2) the number of shares of Common Stock Deemed Outstanding immediately prior to such declaration, plus the number of shares of Common Stock issued or deemed issued in connection with such declaration.

(vi) Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Series B Preferred Stock Conversion Price, the following will be applicable:

(A) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock, other than shares of Common Stock issued or issuable to officers, directors or employees of, or consultants and advisors to, the Corporation pursuant to a stock grant, option plan or purchase plan or other stock incentive program or arrangement approved by the Board of Directors for employees, directors, consultants or advisors to the Corporation (such rights or options being herein called “Options” and such convertible or exchangeable stock or securities being herein called “Convertible Securities”), and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Series B Preferred Stock Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options will be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For purposes of this paragraph, the “price per share for which Common Stock is issuable” will be determined by dividing (y) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon

exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (z) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Series B Preferred Stock Conversion Price will be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

(B) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Series B Preferred Stock Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities will be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For the purposes of this paragraph, the “price per share for which Common Stock is issuable” will be determined by dividing (y) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (z) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Series B Preferred Stock Conversion Price will be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Series B Preferred Stock Conversion Price had been or are to be made pursuant to other provisions of this Section 8, no further adjustment of the Series B Preferred Stock Conversion Price will be made by reason of such issue or sale.

(C) Change in Number of Options, Option Price or Conversion Rate. If the number of Options available, the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock shall change at any time (other than a change resulting from the antidilution provisions thereof), the Series B Preferred Stock Conversion Price in effect at the time of such change will be readjusted to the Series B Preferred Stock Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed number, purchase price, additional

consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.

(D) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series B Preferred Stock Conversion Price then in effect hereunder will be adjusted to the Series B Preferred Stock Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued.

(vii) For the purposes of this Section 8:

(A) Calculation of Consideration Received. If any Common Stock is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Corporation therefor. In case any Common Stock is issued or sold or deemed to have been issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the market value thereof as of the date of sale or issuance. If any Common Stock is issued or deemed to be issued in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the nonsurviving corporation as is attributable to such Common Stock. The fair value of any consideration other than cash and securities will be determined jointly by the Corporation and the holders of a majority of the outstanding Series B Preferred Stock. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration will be determined by an independent appraiser jointly selected by the Corporation and the holders of a majority of the outstanding Series B Preferred Stock and if such persons are unable to agree upon an appraiser, such appraiser will be selected by (i) an independent appraiser selected by the Corporation and (ii) an independent appraiser selected by the holders of a majority of the outstanding Series B Preferred Stock; the cost of such independent appraiser determining the fair value of such consideration shall be borne by the Corporation.

(B) Integrated Transactions. In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option or Convertible Security by the parties thereto, the Option or Convertible Security will be deemed to have been issued without consideration.

(C) Reorganization, Reclassification, Consolidation, Merger or Sale. Any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Corporation’s assets to another person which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or

assets with respect to or in exchange for Common Stock is referred to herein as an “Organic Change.” Prior to the consummation of any Organic Change, the Corporation will make appropriate provisions to insure that each of the holders of Preferred Stock will thereafter have the right to acquire and receive such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Preferred Stock immediately prior to such Organic Change. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the Corporation purchasing such assets assumes by written instrument the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire.

(c) Certain Definitions. For purposes of this Section 8, “Common Stock Deemed Outstanding” shall mean the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock issuable upon the exercise, exchange, or conversion of all outstanding securities exercisable or exchangeable for, or convertible into, shares of Common Stock but excluding issued and outstanding options to purchase Common Stock with an exercise price per share in excess of $6.70 (as adjusted for stock splits, consolidations and the like). For purposes of this Section 8, “Fair Market Value” means, with respect to any shares of stock or other securities, (i) if such stock or securities are listed or admitted to trading on a national securities exchange or on NASDAQ, the arithmetic average per share of the closing bid prices for such security on each of the five (5) consecutive trading days immediately preceding such date of determination (all such determinations to be appropriately adjusted for any stock dividend, stock split or similar transaction during the pricing period) and (ii) if such stock or security is not so listed or admitted to unlisted trading privileges, the current fair market value of such stock or security as determined in good faith by the Board of Directors of the Corporation; provided that in the case of clause (i), if the issuance of such stock or securities is publicly announced prior to the date of issuance, but not more than 30 days prior to such issuance, the date of determination shall be the date of such announcement.

(d) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions, then the Corporation’s Board of Directors will make an appropriate adjustment in the Series B Preferred Stock Conversion Price so as to protect the rights of the holders of Series B Preferred Stock; provided, however, that no such adjustment will increase the Series B Preferred Stock Conversion Price as otherwise determined pursuant to this Section 8 or decrease the number of shares of Common Stock issuable upon conversion of each share of Series B Preferred Stock.

(e) Mechanics of Forced Conversion. The Conversion Notice shall be given by the Corporation by mail, postage prepaid, or by facsimile transmission to non-U.S. residents, to each holder of record (at the close of business on the business day next preceding the day on which the Conversion Notice is given) of shares of Series B Preferred Stock, notifying such holder of the conversion, specifying the effective date for the conversion (the “Conversion Date”) and the number of shares of Common Stock (and other property, securities and/or assets) issuable upon conversion of each share of Series B Preferred Stock, and certifying to the holders of the Series B Preferred Stock that the Corporation has authorized and reserved a sufficient number of shares of Common Stock to support the conversion of all of the then outstanding shares of Series B Preferred

Stock. The Conversion Notice shall be addressed to each holder at his, her or its address as shown by the records of the Corporation. No fractional shares of Common Stock shall be issued upon conversion of shares of Series B Preferred Stock. All shares of Common Stock issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after aggregation, the conversion would result in the issuance of a fractional share, the Corporation shall, in lieu of issuing any fractional share, pay the holder a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors, based on the average closing price of the Common Stock as reported in the Wall Street Journal for the twenty (20) consecutive trading days prior to the date of conversion). From and after the Conversion Date, each certificate for the Series B Preferred Stock shall represent such number of shares of Common Stock (and the right to receive any other property, securities and/or assets) issued upon conversion of the number of shares of Series B Preferred Stock represented by such certificate. Each holder of Series B Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Preferred Stock on or as soon as practicable after the Conversion Date. The Corporation shall, on the Conversion Date or as soon as practicable thereafter, subject to receipt of the stock certificate for the Series B Preferred Stock, issue and deliver to each holder of shares of Series B Preferred Stock, a certificate or certificates for the number of shares of Common Stock (and such other property, securities and/or assets) to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.

(f) Optional Conversion between Series B-1 Voting Preferred Stock, Series B-2 Non-Voting Preferred Stock and Series B-3 Preferred Stock. Each share of Series B-2 Non-Voting Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock, into one fully paid and nonassessable share of Series B-1 Voting Preferred Stock or Series B-3 Preferred Stock. Each share of Series B-1 Voting Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock, into one fully paid and nonassessable share of Series B-2 Non-Voting Preferred Stock or Series B-3 Preferred Stock. Each share of Series B-3 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock, into one fully paid and nonassessable share of Series B-2 Non-Voting Preferred Stock or Series B-1 Voting Preferred Stock. Before any holder shall be entitled to convert its Series B-2 Non-Voting Preferred Stock, Series B-1 Voting Preferred Stock or Series B-3 Preferred Stock, as the case may be, into shares of another series of Series B Preferred Stock, as the case may be, and receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Preferred Stock and shall give written notice to the Corporation at such office that such holder elects to convert the same. Any shares of Series B Preferred Stock presented for conversion pursuant to this paragraph (b) shall be deemed converted as of the close of business on the date certificates are so surrendered. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of shares of Series B-2 Non-Voting Preferred Stock, Series B-1 Voting Preferred Stock or Series

B-3 Preferred Stock, as the case may be, a certificate or certificates for the number of shares of Series B Preferred Stock, as the case may be, to which such holder shall be entitled as aforesaid.

(g) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number as shall be sufficient for such purpose, including engaging in commercially reasonable efforts to obtain the requisite stockholder approval; provided, however, that the rights contained in this Certificate, including but not limited to the right of redemption pursuant to Section 7, shall constitute the Series B Preferred Stock holders’ sole remedy in the event that the Corporation fails to obtain the requisite stockholder approval to increase the number of authorized but unissued shares of Common Stock in a manner sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock.

Section 9. Ranking. The Series B Preferred Stock shall rank senior to all other series of the Corporation’s Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

Section 10. Fractional Shares. Series B Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders’ fractional shares to exercise voting rights, receive dividends, convert, participate in distributions and to have the benefit of all other rights of holders of Series B Preferred Stock.

Section 11. General Authorization. The Chief Executive Officer or the Vice President and the Secretary or any Assistant Secretary of the Corporation are each authorized to do or cause to be done all such acts or things and to make, execute and deliver or cause to be made, executed and delivered all such agreements, documents, instruments and certificates in the name of and on behalf of the Corporation or otherwise as they deem necessary, desirable or appropriate to execute or carry out the purpose and intent of the foregoing.

IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 26^th day of September, 2002.

RURAL/METRO CORPORATION
By:	/s/    JACK E. BRUCKER
Name:	Jack E. Brucker
Title:	President and Chief Executive Officer

Attest:
By:	/s/    JOHN S. BANAS III
Name:	John S. Banas III
Title:	Assistant Secretary

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CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS

OF SERIES C PREFERRED STOCK

of

RURAL/METRO CORPORATION

Pursuant to Section 151 of the General Corporation Law of the State of Delaware Rural/Metro Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 151 thereof, does hereby certify that pursuant to the authority conferred upon the Board of Directors by the Second Restated Certificate of Incorporation of the Corporation, the said Board of Directors on September 25, 2003, adopted the following resolution creating one new series of Preferred Stock, par value $.01 per share, designated as Series C Preferred Stock:

RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Second Restated Certificate of Incorporation, one series of Preferred Stock of the Corporation be and hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, are as follows:

Section 12. Designation and Amount. 283,979 shares shall be designated as “Series C Preferred Stock” (the “Series C Preferred Stock”).

Section 13. Dividends and Distributions.

(a) The holders of shares of Series C Preferred Stock shall be entitled to receive dividends payable out of funds legally available therefor. Such dividends shall be payable only when, as, and if declared by the Board of Directors and shall be noncumulative.

(b) No dividends shall be paid on any Common Stock of the Corporation, par value $.01 per share (the “Common Stock”), unless a dividend (including the amount of any dividends paid pursuant to the above provisions of this section) is paid with respect to all outstanding shares of Series C Preferred Stock in an amount for each such share of Series C Preferred Stock equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Series C Preferred Stock could then be converted. No dividends shall be paid on any Series B Preferred Stock of the Corporation, par value $.01 per share (the “Series B Preferred Stock”), unless a dividend is paid with respect to all outstanding shares of Series C Preferred Stock in an amount for each such share of Series C Preferred Stock equal to or greater than such dividend per share of Series B Preferred Stock.

(c) The Board of Directors may fix a record date for the determination of holders of shares of Series C Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

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Section 14. Voting Rights. Each share of Series C Preferred Stock shall entitle the holder thereof to that number of votes equal to the number of shares of Common Stock into which one share of Series C Preferred Stock would then be converted if automatically converted pursuant to Section 8(a) hereof, regardless of whether there were sufficient shares of Common Stock authorized for such conversion, and shall entitle the holder to vote on all matters submitted to a vote of the stockholders of the Corporation. Except as otherwise provided herein or by law, the holders of shares of Series C Preferred Stock, the holders of shares of Common Stock and the holders of shares of Series B Preferred Stock (to the extent entitled to vote) shall vote together as one class on all matters submitted to a vote of the stockholders of the Corporation.

Section 15. Certain Restrictions.

(a) So long as any shares of Series C Preferred Stock remain outstanding, the Corporation shall not, without the vote or written consent by the holders of at least a majority of the then outstanding shares of the Series C Preferred Stock voting as one class:

(i) declare or pay dividends on, make any other distributions on, or redeem, purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock;

(ii) purchase or otherwise acquire for consideration (or pay into or set aside for a sinking fund for such purpose) any shares of Series C Preferred Stock, except in accordance with Section 7;

(iii) authorize, issue or obligate itself to issue shares of any equity security, including securities exercisable into equity securities, which rank senior to or on a parity with the Series C Preferred Stock with respect to rights to receive distributions upon liquidation, with respect to dividends or with respect to redemption or in any other manner;

(iv) increase or decrease the number of authorized shares of Series C Preferred Stock;

(v) redeem, purchase, or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any of the Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares at cost or at cost plus interest upon the occurrence of certain events, such as the termination of employment;

(vi) amend, alter or repeal any provision of its Second Restated Certificate of Incorporation, by-laws, or the resolution providing for the issuance of the Series C Preferred Stock, or pass any stockholder resolutions, including such action effected by merger or similar transaction in which the Corporation is the surviving corporation, if such amendment or resolution would change any of the rights, preferences or privileges provided for herein for the benefit of any shares of the Series C Preferred Stock; or

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(vii) issue or sell, or take any action that in accordance with Section 8(b)(vi) would be deemed to constitute the issuance or sale of, any shares of its Common Stock if the limitation contained in the last sentence of Section 8(b)(ii) would apply to such issuance or sale.

(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

Section 16. Reacquired Shares. Any shares of Series C Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

Section 17. Liquidation, Dissolution or Winding Up.

.

(a) Upon the commencement of any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock unless, prior and in preference thereto, the holders of shares of Series C Preferred Stock shall have received their pro rata share of the greater of (i) the amount of money or other consideration to which all of the holders of the Series C Preferred Stock would have been entitled had the Series C Preferred Stock been converted in accordance with Section 8, regardless of whether there were sufficient shares of Common Stock authorized for such conversion, or (ii) if such distribution is to be received by the holders of the Series C Preferred Stock before January 31, 2004, then $11,000,000, if such distribution is to be received by the holders of the Series C Preferred Stock during the period from January 31, 2004 to and including December 31, 2004, then $13,750,000 and if such distribution is to be received by the holders of the Series C Preferred Stock at any time thereafter, then $16,500,000, plus, in the case of both clause (i) and clause (ii), all accrued or declared but unpaid dividends on the Series C Preferred Stock (the “Series C Liquidation Preference”).

(b) In the event that there are not sufficient assets available to permit payment in full of the Series C Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series C Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences.

(c) For purposes of this Section 6, (i) any acquisition of the Corporation by means of merger, consolidation or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (other than a mere reincorporation transaction), (ii) any acquisition by any person or group of persons acting in concert of more than 50% of the voting control of the Corporation, or (iii) a sale of all or substantially all of the assets of the Corporation, shall be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the

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holders of Series C Preferred Stock to receive at the closing the amount set forth in Section 6(a); provided, however, that the holders of a majority of the Series C Preferred Stock may determine that the occurrence of any event described in this Section 6(c) shall not be deemed a liquidation, dissolution or winding up of the Corporation.

(d) Written notice of any liquidation, dissolution or winding up of the Corporation (including pursuant to paragraph (c) of this Section 6 stating the payment date or dates and the place where the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than 30 days prior to any payment date stated therein, to the holders of record of the shares of Series C Preferred Stock at their address as the same shall appear in the records of the Corporation.

Section 18. Redemption.

(a) Mandatory Redemption. The Corporation shall redeem all outstanding shares of Series C Preferred Stock on December 31, 2006 (the “Mandatory Redemption Date”). All shares of Series C Preferred Stock to be redeemed shall be redeemed by paying to each holder of Series C Preferred Stock its pro rata share of an aggregate amount equal to the greater of (i) $10,000,000, plus accrued dividends, if any, on the Series C Preferred Stock, or (ii) the value of the Common Stock then issuable upon conversion of the Series C Preferred Stock, based on the average closing price of the Common Stock as reported in the Wall Street Journal for the twenty (20) consecutive trading days prior to December 24, 2006 (the “Trading Value”). If the capital of the Corporation on the Mandatory Redemption Date is insufficient under applicable law to redeem the total number of outstanding shares of Series C Preferred Stock to be redeemed on the Mandatory Redemption Date, the holders of shares of Series C Preferred Stock shall share ratably in any payment legally available for redemption of such shares on the Mandatory Redemption Date according to the respective amounts which would be payable with respect to the full number of shares owned by such holders if all such outstanding shares were redeemed in full prior to any payments to the holders of Series C Preferred Stock, and any shares of Series C Preferred Stock not so redeemed shall remain issued and outstanding, with all rights and preferences applicable thereto, until such time as such Series C Preferred Stock is redeemed by the Corporation pursuant to this Section 7. At any time thereafter when the capital of the Corporation is sufficient under applicable law to redeem such shares of Series C Preferred Stock, the Corporation shall make such payments as are legally available for redemption of such shares to redeem the balance of such shares of Series C Preferred Stock, or such portion thereof for which capital is then legally sufficient, on the basis set forth above.

(b) Redemption Mechanics.

(i) At least 10 days but not more than 30 days prior to the Mandatory Redemption Date, written notice (the “Redemption Notice”) shall be given by the Corporation by mail, postage prepaid, or by facsimile transmission to non-U.S. residents, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series C Preferred Stock, notifying such holder of the redemption and specifying the number of shares of Series C Preferred Stock to be redeemed, the Series C Liquidation Preference, the pro rata portion of the Series C Liquidation Preference per share of Series C Preferred Stock, the number of outstanding shares of Series C Preferred Stock, the

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Mandatory Redemption Date and the place where said Series C Liquidation Preference or Trading Value, as the case may be, shall be payable. The Redemption Notice shall be addressed to each holder at his or her or its address as shown by the records of the Corporation. On the Mandatory Redemption Date, the Corporation shall be obligated to redeem all of the issued and outstanding shares of Series C Preferred Stock and all funds necessary for such redemption shall be set aside by the Corporation.

(ii) On or before the Mandatory Redemption Date, the Corporation shall deposit the amount of the Series C Liquidation Preference as of December 24, 2006, or the Trading Value, whichever amount is greater, with a nationally recognized bank or trust company with $100,000,000 or more of tangible net assets having an office in the City of New York, designated in the Redemption Notice, irrevocably in trust for the benefit of the holders of Series C Preferred Stock and thereafter each share of Series C Preferred Stock shall be deemed to have been redeemed on the Mandatory Redemption Date, whether or not the certificate for such share of Series C Preferred Stock shall be surrendered for redemption and canceled. Upon surrender to the Corporation by the holder of such share of Series C Preferred Stock of the certificate representing such Series C Preferred Stock, the Corporation shall immediately pay the applicable pro rata portion of the Series C Liquidation Preference or the Trading Value, as the case may be, to such holder. In the event that the capital of the Corporation is insufficient under applicable law to redeem the total number of outstanding shares of Series C Preferred Stock pursuant to Section 7(a) on the Mandatory Redemption Date, the Corporation shall deposit, irrevocably in trust for the benefit of the holders of Series C Preferred Stock, such amount as is legally available for redemption of such shares on the Mandatory Redemption Date.

Section 19. Conversion.

(a) Forced Conversion. The Corporation shall have the right, exercisable at any time prior to December 31, 2006 and upon at least 10 days but not more than 30 days prior written notice (the “Conversion Notice”), to cause all, but not less than all, of the then outstanding shares of Series C Preferred Stock to be converted into such number of fully paid and nonassessable shares of the Common Stock of the Corporation as is obtained by multiplying the number of shares of Series C Preferred Stock to be so converted by the quotient, the numerator of which is ten multiplied by $2.55 (the “Original Price”) and the denominator of which is the Series C Preferred Stock Conversion Price as last adjusted and in effect at the date any share or shares of Series C Preferred Stock are surrendered for conversion.

(b) Series C Preferred Stock Conversion Price.

(i) The initial “Series C Preferred Stock Conversion Price” shall be the Original Price. In order to prevent dilution of the conversion rights granted under this Section 8, the Series C Preferred Stock Conversion Price will be subject to adjustment from time to time pursuant to this Section 8(b).

(ii) Except as provided below, if and whenever the Corporation shall issue or sell, or in accordance with Section 8(b)(vi) is deemed to have issued or sold, any shares of its Common Stock without consideration or for a consideration per share less than the Fair Market Value on the date of such issuance or sale, then the Series C Preferred Stock Conversion Price shall

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be determined by multiplying (A) the Series C Preferred Stock Conversion Price in effect on the day immediately prior to such date by (B) a fraction, the numerator of which shall be the sum of (1) the number of shares of Common Stock Deemed Outstanding immediately prior to such sale or issuance and (2) the number of shares of Common Stock calculated by dividing the aggregate consideration receivable by the Corporation for the total number of shares of Common Stock so issued (or into or for which the rights, options, warrants or other securities are convertible, exercisable or exchangeable) by the Fair Market Value, and the denominator of which shall be the sum of (x) the total number of shares of Common Stock Deemed Outstanding immediately prior to such sale or issue and (y) the number of additional shares of Common Stock issued (or into or for which the rights, options, warrants or other securities may be converted, exercised or exchanged). In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such noncash consideration shall be utilized in the foregoing computation. Such fair market value shall be determined in good faith by the Board of Directors. Notwithstanding the foregoing, no adjustment will be made to the Series C Preferred Stock Conversion Price pursuant to this Section 8(b)(ii) to the extent, but only to the extent, such adjustment would entitle the holders of the Series C Preferred Stock to receive upon conversion thereof an aggregate number of shares of Common Stock in an amount equaling 20% or more of the total number of shares of Common Stock outstanding on the date the Series C Preferred Stock is first issued (the “Outstanding Common Number”), as the Outstanding Common Number may be adjusted to reflect any subdivision (by stock split, stock split-up, stock dividend, recapitalization or otherwise), combination (by reverse stock split or otherwise) or dividend or distribution contemplated by Section 8(b)(v).

(iii) If the Corporation at any time subdivides (by any stock split, stock split-up, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of its Common Stock into a greater number of shares, the Series C Preferred Stock Conversion Price in effect immediately prior to such subdivision will be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of its Common Stock, the Series C Preferred Stock Conversion Price in effect immediately prior to such combination will be proportionately increased.

(iv) If the Corporation at any time subdivides (by any stock split, stock split-up, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of its Series C Preferred Stock into a greater number of shares, the Series C Preferred Stock Conversion Price in effect immediately prior to such subdivision will be proportionately increased, and if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of its Series C Preferred Stock, the Series C Preferred Stock Conversion Price in effect immediately prior to such combination will be proportionately reduced.

(v) In case the Corporation shall declare a dividend or make any distribution upon any stock of the Corporation payable in Common Stock or Options or Convertible Securities (as defined in subsection (vi) below) to purchase Common Stock without making a ratable distribution thereof to holders of Series C Preferred Stock (based upon the number of shares of Common Stock into which such Series C Preferred Stock would be convertible, assuming conversion), then the Series C Preferred Stock Conversion Price in effect immediately prior to the declaration of such dividend or distribution shall be reduced to the quotient obtained by dividing (1) the product of (x) the Common Stock Deemed Outstanding immediately prior to such

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declaration and (y) the then effective Series C Preferred Stock Conversion Price, by (2) the number of shares of Common Stock Deemed Outstanding immediately prior to such declaration, plus the number of shares of Common Stock issued or deemed issued in connection with such declaration.

(vi) Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Series C Preferred Stock Conversion Price, the following will be applicable:

(A) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock, other than shares of Common Stock issued or issuable to officers, directors or employees of, or consultants and advisors to, the Corporation pursuant to a stock grant, option plan or purchase plan or other stock incentive program or arrangement approved by the Board of Directors for employees, directors, consultants or advisors to the Corporation (such rights or options being herein called “Options” and such convertible or exchangeable stock or securities being herein called “Convertible Securities”), and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Series C Preferred Stock Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options will be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For purposes of this paragraph, the “price per share for which Common Stock is issuable” will be determined by dividing (y) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (z) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Series C Preferred Stock Conversion Price will be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

(B) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Series C Preferred Stock Conversion Price in

42

effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities will be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For the purposes of this paragraph, the “price per share for which Common Stock is issuable” will be determined by dividing (y) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (z) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Series C Preferred Stock Conversion Price will be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Series C Preferred Stock Conversion Price had been or are to be made pursuant to other provisions of this Section 8, no further adjustment of the Series C Preferred Stock Conversion Price will be made by reason of such issue or sale.

(C) Change in Number of Options, Option Price or Conversion Rate. If the number of Options available, the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock shall change at any time (other than a change resulting from the antidilution provisions thereof), the Series C Preferred Stock Conversion Price in effect at the time of such change will be readjusted to the Series C Preferred Stock Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed number, purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.

(D) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series C Preferred Stock Conversion Price then in effect hereunder will be adjusted to the Series C Preferred Stock Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued.

(vii) For the purposes of this Section 8:

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(A) Calculation of Consideration Received. If any Common Stock is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Corporation therefor. In case any Common Stock is issued or sold or deemed to have been issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the market value thereof as of the date of sale or issuance. If any Common Stock is issued or deemed to be issued in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the nonsurviving corporation as is attributable to such Common Stock. The fair value of any consideration other than cash and securities will be determined jointly by the Corporation and the holders of a majority of the outstanding Series C Preferred Stock. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration will be determined by an independent appraiser jointly selected by the Corporation and the holders of a majority of the outstanding Series C Preferred Stock and if such persons are unable to agree upon an appraiser, such appraiser will be selected by (i) an independent appraiser selected by the Corporation and (ii) an independent appraiser selected by the holders of a majority of the outstanding Series C Preferred Stock; the cost of such independent appraiser determining the fair value of such consideration shall be borne by the Corporation.

(B) Integrated Transactions. In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option or Convertible Security by the parties thereto, the Option or Convertible Security will be deemed to have been issued without consideration.

(C) Reorganization, Reclassification, Consolidation, Merger or Sale. Any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Corporation’s assets to another person which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “Organic Change.” Prior to the consummation of any Organic Change, the Corporation will make appropriate provisions to insure that each of the holders of Preferred Stock will thereafter have the right to acquire and receive such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Preferred Stock immediately prior to such Organic Change. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the Corporation purchasing such assets assumes by written instrument the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire.

(c) Certain Definitions. For purposes of this Section 8, “Common Stock Deemed Outstanding” shall mean the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock issuable upon the exercise, exchange, or conversion of all outstanding securities exercisable or exchangeable for, or convertible into, shares of

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Common Stock but excluding issued and outstanding options to purchase Common Stock with an exercise price per share in excess of $6.70 (as adjusted for stock splits, consolidations and the like). For purposes of this Section 8, “Fair Market Value” means, with respect to any shares of stock or other securities, (i) if such stock or securities are listed or admitted to trading on a national securities exchange or on NASDAQ, the arithmetic average per share of the closing bid prices for such security on each of the five (5) consecutive trading days immediately preceding such date of determination (all such determinations to be appropriately adjusted for any stock dividend, stock split or similar transaction during the pricing period) and (ii) if such stock or security is not so listed or admitted to unlisted trading privileges, the current fair market value of such stock or security as determined in good faith by the Board of Directors of the Corporation; provided that in the case of clause (i), if the issuance of such stock or securities is publicly announced prior to the date of issuance, but not more than 30 days prior to such issuance, the date of determination shall be the date of such announcement.

(d) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions, then the Corporation’s Board of Directors will make an appropriate adjustment in the Series C Preferred Stock Conversion Price so as to protect the rights of the holders of Series C Preferred Stock; provided, however, that no such adjustment will increase the Series C Preferred Stock Conversion Price as otherwise determined pursuant to this Section 8 or decrease the number of shares of Common Stock issuable upon conversion of each share of Series C Preferred Stock.

(e) Mechanics of Forced Conversion. The Conversion Notice shall be given by the Corporation by mail, postage prepaid, or by facsimile transmission to non-U.S. residents, to each holder of record (at the close of business on the business day next preceding the day on which the Conversion Notice is given) of shares of Series C Preferred Stock, notifying such holder of the conversion, specifying the effective date for the conversion (the “Conversion Date”) and the number of shares of Common Stock (and other property, securities and/or assets) issuable upon conversion of each share of Series C Preferred Stock, and certifying to the holders of the Series C Preferred Stock that the Corporation has authorized and reserved a sufficient number of shares of Common Stock to support the conversion of all of the then outstanding shares of Series C Preferred Stock. The Conversion Notice shall be addressed to each holder at his, her or its address as shown by the records of the Corporation. No fractional shares of Common Stock shall be issued upon conversion of shares of Series C Preferred Stock. All shares of Common Stock issuable upon conversion of more than one share of Series C Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after aggregation, the conversion would result in the issuance of a fractional share, the Corporation shall, in lieu of issuing any fractional share, pay the holder a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors, based on the average closing price of the Common Stock as reported in the Wall Street Journal for the twenty (20) consecutive trading days prior to the date of conversion). From and after the Conversion Date, each certificate for the Series C Preferred Stock shall represent such number of shares of Common Stock (and the right to receive any other property, securities and/or assets) issued upon conversion of the number of shares of Series C Preferred Stock represented by such certificate. Each holder of Series C Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series C Preferred Stock on or as soon as practicable after the

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Conversion Date. The Corporation shall, on the Conversion Date or as soon as practicable thereafter, subject to receipt of the stock certificate for the Series C Preferred Stock, issue and deliver to each holder of shares of Series C Preferred Stock, a certificate or certificates for the number of shares of Common Stock (and such other property, securities and/or assets) to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.

(f) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series C Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series C Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all outstanding shares of Series C Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number as shall be sufficient for such purpose. The Corporation shall use its best efforts to obtain the requisite stockholder approval, including using its best efforts to present a proposal to increase its authorized but unissued shares of Common Stock two times during calendar year 2004 (if the proposal is not approved upon first presentation). The rights contained in this Certificate, including but not limited to the right of redemption pursuant to Section 7, shall constitute the Series C Preferred Stock holders’ sole remedy in the event that the Corporation fails to obtain the requisite stockholder approval to increase the number of authorized but unissued shares of Common Stock in a manner sufficient to effect the conversion of all outstanding shares of Series C Preferred Stock.

Section 20. Ranking. The Series C Preferred Stock shall rank senior to all other series of the Corporation’s Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

Section 21. Fractional Shares. Series C Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders’ fractional shares to exercise voting rights, receive dividends, convert, participate in distributions and to have the benefit of all other rights of holders of Series C Preferred Stock.

Section 22. General Authorization. The Chief Executive Officer or the Vice President and the Secretary or any Assistant Secretary of the Corporation are each authorized to do or cause to be done all such acts or things and to make, execute and deliver or cause to be made, executed and delivered all such agreements, documents, instruments and certificates in the name of and on behalf of the Corporation or otherwise as they deem necessary, desirable or appropriate to execute or carry out the purpose and intent of the foregoing.

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IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 26^th day of September, 2003.

RURAL/METRO CORPORATION
	/s/    JOHN S. BANAS III
Name:	John S. Banas III
Title:	Senior Vice President

Attest:

By:	/s/    MICHAEL S. ZARRIELLO
Name:	Michael S. Zarriello
Title:	Senior Vice President and Chief Financial Officer

EX-10.16(Q)

Exhibit 10.16(q)

EMPLOYMENT AGREEMENT

This Employment Agreement (“Agreement”) is made and entered into by and between MICHAEL S. ZARRIELLO (“Executive”) and RURAL/METRO CORPORATION, its subsidiaries, affiliates, joint ventures and partnerships (“Rural/Metro”). The Effective Date of this Agreement is June 2, 2004.

R E C I T A L S

A. The Board of Directors of Rural/Metro believes it is in the best interests of Rural/Metro to employ Executive as the Senior Vice President and Chief Financial Officer of Rural/Metro. The Board of Directors believes that Executive is, and is expected to continue to be, a key contributor to the success of Rural/Metro. Due to Executive’s experience, Executive has particular skills and knowledge that the Board of Directors believes is imperative to retain for the benefit of Rural/Metro, its customers and all of its financial stakeholders.

B. Rural/Metro has decided to offer Executive an employment agreement, the terms and provisions of which are set forth below. Rural/Metro and Executive each desire to enter into this Agreement and, by doing so, mutually establish and maintain a meaningful long-term commitment to each other based upon the terms and provisions herein.

NOW, THEREFORE, IT IS HEREBY MUTUALLY AGREED AS FOLLOWS:

1. POSITION AND DUTIES.

Executive will be employed as the Senior Vice President and Chief Financial Officer of Rural/Metro and shall have a primary reporting relationship to the Chief Executive Officer (“CEO”), with accountability to the Board of Directors of Rural/Metro (the “Board”) generally acting through its Audit Committee (the “Audit Committee”). Executive shall perform the duties of his position, as determined by the CEO and the Board, in accordance with the policies, practices and bylaws of Rural/Metro. For the duration of his employment, Executive shall attend all meetings of the Board of Directors and Audit Committee as and when requested by the Board of Directors or the Audit Committee. Executive shall serve Rural/Metro faithfully, loyally, honestly and to the best of his ability. Executive will devote his best efforts to the performance of his duties for, and in the business and affairs of, Rural/Metro. Rural/Metro reserves the right, in its sole discretion, to change or modify Executive’s position, title and duties during the term of this Agreement, subject to Executive’s rights under Section 6.

2. COMPENSATION.

A. Base Salary.

As of the Effective Date, Executive’s annual compensation will be Three Hundred Four Thousand Five Hundred Dollars ($304,500) (“Base Salary”). Executive’s Base Salary will be paid in substantially equal periodic installments in accordance with Rural/Metro’s generally-applicable payroll practices. Executive’s Base Salary will be reviewed at least annually in accordance with Rural/Metro’s executive compensation review policies and practices.

3. MANAGEMENT INCENTIVE PROGRAM.

Executive shall be eligible to participate in the Rural/Metro Management Incentive Program or any other incentive compensation program maintained by Rural/Metro from time to time (“MIP”) and to receive such additional compensation as may be provided by the MIP. As of the date of this Agreement, the maximum potential incentive compensation (or bonus) to which Executive may become entitled under the current Management Incentive Program is forty-five percent of Executive’s Base Salary, which percentage may be adjusted at any time by Rural/Metro subject to the limitations set forth in Section 6(A). Notwithstanding anything to the contrary in the MIP regarding eligibility in the event of termination of employment: (i) in the event Executive’s employment is terminated without Cause as set forth in Section 5(B) of this Agreement, is terminated for Good Reason as set forth in Section 6(A) of this Agreement, or is terminated by reason of death or Disability as set forth in Section 7 of this Agreement, then Executive shall be paid a pro-rata portion of the compensation awarded (or to be awarded, as the case may be) pursuant to the MIP for the MIP plan year in which such termination occurs, which pro-rata portion (a) shall be calculated by dividing the annual MIP award amount (as determined pursuant to the last sentence of this Section 3), if any, by 365 days and multiplying that quotient by the number of days during the MIP plan year that Executive was employed through the date of termination, and (b) shall be paid at such time as is determined pursuant to the MIP; and (ii) in the event Executive’s employment is terminated for Cause as set forth in Section 5(A) of this Agreement or is terminated without Good Reason as set forth in Section 6(B) of this Agreement, then Executive shall not be eligible to receive compensation awarded pursuant to the MIP. In determining the partial-year MIP award (if any), it is intended that (i) accomplishment of quantitative goals shall be evaluated based on full-year financial performance; and (ii) accomplishment of so-called “soft” goals shall be evaluated in good faith in a manner consistent with similar evaluations in prior years based on Executive’s performance through the date of termination of active employment. Notwithstanding the foregoing, Executive acknowledges the discretionary nature of the MIP.

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4. TERM AND TERMINATION.

This Agreement will continue in full force and effect until it is terminated by the parties. This Agreement may be terminated in any of the following ways: (a) it may be renegotiated and replaced by a written agreement signed by both parties; (b) Rural/Metro may elect to terminate this Agreement with or without “Cause”, as defined below; (c) Executive may elect to terminate this Agreement with or without “Good Reason”, as defined below; (d) either party may serve notice on the other of its desire to terminate this Agreement at the end of the “Initial Term” or any “Renewal Term”, or (e) this Agreement may terminate automatically upon Executive’s death or Disability pursuant to Section 7.

The “Initial Term” of this Agreement shall expire by its terms three (3) years from the Effective Date, unless sooner terminated in accordance with the provisions of this Agreement. This Agreement will be renewed at the end of the Initial Term for additional one-year periods (a “Renewal Term”), unless either party serves notice of its desire not to renew this Agreement on the other. Such notice must be given at least sixty (60) days before the end of the Initial Term or the applicable Renewal Term.

If Rural/Metro notifies Executive of its desire not to renew this Agreement pursuant to this Section 4 and at the time of such notification Rural/Metro does not have “Cause” to terminate this Agreement pursuant to Section 5A, Executive shall receive Severance Benefits pursuant to Section 8.

5. TERMINATION BY RURAL/METRO

A. Termination For Cause.

Rural/Metro may terminate this Agreement and Executive’s employment for Cause at any time upon written notice. This means that Rural/Metro has the right to terminate the employment relationship for Cause at any time should there be Cause to do so.

For purposes of this Agreement, “Cause” shall be limited to discharge resulting from a determination by an affirmative vote of 75% of the Board of Directors then in office that Executive: (a) has been convicted of (or has pleaded guilty or no contest to) a felony involving dishonesty, fraud, theft or embezzlement; (b) has repeatedly failed or refused, in a material respect to follow reasonable policies or directives established by Rural/Metro, if the failure or refusal has not been cured within thirty (30) days after Rural/Metro has provided written notice to Executive of the specific conduct constituting such failure or refusal; (c) has willfully and persistently failed or refused to attend to material duties or obligations imposed upon him under this Agreement, if the failure or refusal has not been cured within thirty (30) days after Rural/Metro has provided written notice to Executive of the specific conduct constituting such failure or refusal; or (d) has misrepresented or concealed a material fact for purposes of

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securing employment with Rural/Metro or this Employment Agreement. The existence of “Cause” shall be determined by Rural/Metro’s Board of Directors acting in good faith after prior notice to Executive and after providing Executive with an opportunity to be heard in a meeting with the Board of Directors.

Because Executive is in a position which involves great responsibilities, Rural/Metro is not required to utilize its progressive discipline policy. In addition, no generally applicable grievance policy shall apply to grievances by Executive regarding his employment relationship with Rural/Metro.

If this Agreement and Executive’s employment is terminated for Cause, Executive shall receive no Severance Benefits.

B. Termination Without Cause.

Rural/Metro also may terminate this Agreement and Executive’s employment without Cause at any time after providing Executive with sixty (60) days advance written notice. In the event this Agreement and Executive’s employment are terminated by Rural/Metro without Cause, Executive shall receive the Severance Benefits pursuant to Section 8. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive’s access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice to Executive. For the avoidance of doubt, any action by Rural/Metro pursuant to the foregoing sentence shall not constitute Good Reason or otherwise constitute a breach of this Agreement by Rural/Metro, and the foregoing sentence or any action by Rural/Metro pursuant thereto shall in no way limit or reduce the rights of Rural/Metro as provided elsewhere herein.

6. TERMINATION BY EXECUTIVE.

Executive may terminate this Agreement and his employment with or without “Good Reason” in accordance with the provisions of this Section 6.

A. Termination For Good Reason.

Executive may terminate this Agreement and his employment for “Good Reason” by giving written notice to Rural/Metro within sixty (60) days, or such longer period as may be agreed to in writing by Rural/Metro, of Executive’s receipt of notice of the occurrence of any event constituting “Good Reason”, as described below.

Executive shall have “Good Reason” to terminate this Agreement and his employment upon the occurrence of any of the following events: (a) Executive is assigned duties inconsistent with the positions, duties, responsibility and status of the Senior Vice President and Chief Financial Officer of Rural/Metro; (b) Executive is required to relocate to an employment location that is more than fifty (50)

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miles from his current employment location (which the parties agree is Rural/Metro’s present Scottsdale headquarters); (c) Executive’s Base Salary rate is reduced to a level that is at least ten percent (10%) less than the salary paid to Executive during the immediately prior calendar year, unless Executive has agreed to said reduction or unless Rural/Metro makes an across-the-board reduction that applies to all executives; or (d) the potential incentive compensation (or bonus) to which Executive may become entitled under the MIP at any level of performance by Executive or Rural/Metro is reduced by ten percent (10%) or more as compared to the immediately prior year, unless Executive has agreed to said reduction or unless Rural/Metro makes an across-the-board reduction that applies to all executives. The following example (which is provided solely as an example) illustrates the operation of subpart (d) of the immediately preceding sentence: If Executive’s maximum potential incentive compensation is reduced to 35% or less of Executive’s Base Salary in a year immediately following a year in which Executive’s maximum potential incentive compensation was 45% of Executive’s Base Salary, the reduction equals 10% or more, and Employee would have Good Reason.

Notwithstanding the above provisions, Executive shall not have “Good Reason” to terminate this Agreement and his employment if, within thirty (30) days of the written notice of Good Reason provided to Rural/Metro by Executive, Rural/Metro corrects, remedies or reverses any event which resulted in Good Reason.

If Executive terminates this Agreement and his employment for Good Reason, Executive shall be entitled to receive Severance Benefits pursuant to Section 8.

B. Termination Without Good Reason.

Executive also may terminate this Agreement and his employment without Good Reason at any time by giving sixty (60) days notice to Rural/Metro. If Executive terminates this Agreement and his employment without Good Reason, Executive shall not receive Severance Benefits pursuant to Section 8.

C. Administrative Leave.

Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive’s access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice of termination by Executive pursuant to Section 6A or 6B. For the avoidance of doubt, any action by Rural/Metro pursuant to the foregoing sentence shall not constitute Good Reason or otherwise constitute a breach of this Agreement by Rural/Metro, and the foregoing sentence or any action by Rural/Metro pursuant thereto shall in no way limit or reduce the rights of Rural/Metro as provided elsewhere herein.

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7. DEATH OR DISABILITY.

This Agreement will terminate automatically on Executive’s death. Any compensation or other amounts due to Executive for services rendered prior to his death shall be paid to Executive’s surviving spouse, or if Executive does not leave a surviving spouse, to Executive’s estate. If Executive is receiving Severance Benefits or is entitled to payment of an MIP award pursuant to Section 3 at the time of his death, then any unpaid Base Salary component of Executive’s Severance Benefits and MIP award shall be paid to Executive’s surviving spouse, or if Executive does not leave a surviving spouse, to Executive’s estate, for the balance of the Severance Period (as defined in Section 8) remaining at the time of Executive’s death. In addition, if, at the time of his death, Executive is receiving Severance Benefits that include the continuation of health, medical, dental, vision or pharmaceutical insurance benefits (as described in Section 8), and Executive’s surviving spouse and/or family member(s) is covered by such health, medical, dental, vision or pharmaceutical insurance benefits through Rural/Metro at the time of Executive’s death, then such coverage of Executive’s surviving spouse and/or family member(s) shall continue throughout the balance of the Severance Period. No other benefits shall be payable to Executive’s heirs pursuant to this Agreement, but amounts may be payable pursuant to any life insurance or other benefit plans maintained by Rural/Metro.

In the event Executive becomes “Disabled,” Executive’s employment hereunder and Rural/Metro’s obligation to pay Executive’s Base Salary (less any amounts payable to Executive pursuant to any long-term disability insurance policy paid for by Rural/Metro) shall continue for a period of six (6) months from the date as of which Executive is determined to have become Disabled, at which point, Executive’s employment hereunder shall automatically cease and terminate. Executive shall be considered “Disabled” or to be suffering from a “Disability” for purposes of this Section 7 if Executive is unable, after any reasonable accommodations required by the Americans with Disabilities Act or other applicable law, to perform the essential functions of his position because of a physical or mental impairment. In the absence of agreement between Rural/Metro and Executive as to whether Executive is Disabled or suffering from a Disability (and the date as of which Executive became Disabled), such determinations shall be made by a licensed physician selected by Rural/Metro. If a licensed physician selected by Executive disagrees with the determination of the physician selected by Rural/Metro, the two physicians shall select a third physician. The decision of the third physician concerning whether Executive is Disabled or suffering from a Disability (and the date as of which Executive became Disabled) shall be binding and conclusive on all interested parties.

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8. SEVERANCE BENEFITS.

If during the Initial Term or any Renewal Term, this Agreement and Executive’s employment are terminated without Cause by Rural/Metro as set forth in Section 5B prior to the last day of the Initial Term or any Renewal Term, or if Executive elects to terminate this Agreement for Good Reason as set forth in Section 6A, Executive shall receive the “Severance Benefits” provided by this Section. In addition, Executive also shall receive the Severance Benefits if his employment is terminated due to Disability as set forth in Section 7 or due to Rural/Metro’s non-renewal of this Agreement as set forth in Section 4.

The Severance Benefits shall begin immediately following the effective date of termination of employment and, except as otherwise provided herein, will continue to be payable for a period (the “Benefit Period”) of twenty-four (24) months thereafter.

The Executive’s Severance Benefits shall consist of the continuation of Executive’s then Base Salary for duration of the Benefit Period, less lawfully required withholdings, and shall be paid in accordance with Rural/Metro’s generally-applicable payroll practices. Such Severance Benefits shall be paid in lieu of any accrued vacation time, but shall not be in lieu of any MIP award or other incentive compensation due to Executive for services rendered prior to the date of termination. The Severance Benefits also shall consist of the continuation of any health, medical, dental, vision or pharmaceutical coverage that Executive was participating in as of the last day of active employment. These coverages shall be continued under COBRA beginning the first day of the month following the effective termination date and shall continue for the duration of the Benefit Period provided that Executive satisfactorily complies with all COBRA election requirements. During the Benefit Period, Executive shall continue to pay the same premiums paid as of the last day of active employment. Executive’s life insurance coverage may be converted to an individual policy within 30 days of the effective termination date. Upon conversion, the cost of maintaining an individual policy resides with Executive. If a particular insurance benefit may not be continued for any reason, Rural/Metro shall pay a “Benefit Allowance” to the Executive. The “Benefit Allowance” will equal 145% of the cost to Rural/Metro of providing the unavailable insurance benefit to a similarly situated employee. The Benefit Allowance shall be paid on a monthly basis or in a single lump sum. The cost of providing the unavailable benefit to a similarly situated employee and whether the Benefit Allowance will be paid in monthly installments or in a lump sum will be determined by Rural/Metro in the exercise of its discretion.

If Executive voluntarily terminates this Agreement and his employment without Good Reason prior to the end of the Initial Term or any Renewal Term, or if Rural/Metro terminates the Agreement and Executive’s employment for Cause, no Severance Benefits shall be paid to Executive. No Severance Benefits are payable in the event of Executive’s death, except as expressly set forth in Section 7 above.

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Severance Benefits will cease if Executive elects to forgo future Severance Benefits pursuant to Section 11G in order to avoid any further restrictions on his ability to engage in a competing business or to solicit employees or clients. If Executive makes an election pursuant to Section 11G, the Severance Benefits will cease as of the effective date of the election.

Severance Benefits and Executive’s right to exercise any stock options also shall immediately cease if Executive commits a material violation of any of the terms of this Agreement relating to confidentiality and non-disclosure, as set forth in Section 10, or the Covenant-Not-To-Compete, as set forth in Section 11. Only material violations will result in the loss of Severance Benefits and the ability to exercise stock options.

The payment of Severance Benefits shall not be affected by whether Executive seeks or obtains other employment. Executive shall have no obligation to seek or obtain other employment and Executive’s Severance Benefits shall not be impacted by Executive’s failure to “mitigate.”

In order to receive the Severance Benefits, Executive must execute any release reasonably requested by Rural/Metro of claims that Executive may have in connection with his employment with Rural/Metro.

9. BENEFITS.

A. Benefit Plans, Insurance, Options, etc.

Executive will be entitled to participate in any benefit plans, including, but not limited to, retirement plans, stock option plans, equity compensation or incentive plans, disability plans, life insurance plans and health, medical, dental, vision and pharmaceutical plans available to other Rural/Metro executive employees, subject to any restrictions (including waiting periods) specified in said plans. With respect to the determination of the amount of any such stock option or other Equity (as defined in Section 8 above) awards next occurring after the date of this Agreement, Rural/Metro shall, at such time as it can and does consider Executive for an award under such plans, take into consideration the fact that Executive did not receive stock options or other Equity at the time he was hired or through the date of this Agreement due to the expiration and non-replacement of Rural/Metro’s 1992 Stock Option Plan. During the term of this Agreement and for a period of six years thereafter, Rural/Metro shall maintain Directors and Officers insurance policy(ies) providing coverage (subject to the terms of such policy) for the acts and omissions of Executive during the term of his employment.

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B. Vacation.

Executive is entitled to four (4) weeks of paid vacation per calendar year, with such vacation to be scheduled and taken in accordance with Rural/Metro’s standard vacation policies. If Executive does not take the full vacation available in any year, the unused vacation may not be carried over to the next calendar year, and Executive will not be compensated for it.

10. CONFIDENTIALITY; NON-DISCLOSURE; OWNERSHIP OF WORK.

A. Confidentiality; Non-Disclosure.

During the course of his employment, Executive will become exposed to a substantial amount of confidential and proprietary information, including, but not limited to, financial information, annual reports, audited and unaudited financial reports, operational budgets and strategies, methods of operation, customer lists, strategic plans, business plans, marketing plans and strategies, new business strategies, merger and acquisition strategies, management systems programs, computer systems, personnel and compensation information and payroll data, and other such reports, documents or information (collectively the “Confidential and Proprietary Information”). In the event his employment is terminated by either party for any reason, Executive promises that he will not, retain, take with him or make any copies of such Confidential and Proprietary Information in any form, format, or manner whatsoever (including computer print-outs, computer tapes, floppy disks, CD-ROMs, etc.) nor will he disclose the same in whole or in part to any person or entity, in any manner either directly or indirectly. Excluded from this Agreement is information that (i) is or becomes publicly known through no violation of this Agreement, (ii) is lawfully received by the Executive from any third party without restriction on disclosure or use, (iii) is required to be disclosed by law, or (iv) is expressly approved in writing by Rural/Metro for release or other use by the Executive. The provisions of this paragraph shall survive the termination of this Agreement.

B. Ownership of Work, Materials and Documents.

All records, reports, notes, compilations, software, programs, designs and/or other recorded or created matters, copies thereof or reproductions, in whatever media form, relating to Rural/Metro’s trade secrets, operations, activities, or business, made or received by Executive during any past, present or future employment with Executive are and shall be works made for hire and are, or shall become the exclusive property of Rural/Metro. Failure to return Rural/Metro’s property, whether during the term of this Agreement or after its termination, shall be a breach of this Agreement. The provisions of this paragraph shall survive the termination of this Agreement.

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11. COVENANT-NOT-TO-COMPETE.

A. Interests to be Protected.

The parties acknowledge that during the term of his employment, Executive will perform essential services for Rural/Metro, its employees and shareholders, and for clients of Rural/Metro. Therefore, Executive will be given an opportunity to meet, work with and develop close working relationships with Rural/Metro’s clients on a first-hand basis and will gain valuable insight as to the clients’ operations, personnel and need for services. In addition, Executive will be exposed to, have access to, and be required to work with, a considerable amount of Rural/Metro’s Confidential and Proprietary Information.

The parties also expressly recognize and acknowledge that the personnel of Rural/Metro have been trained by, and are valuable to Rural/Metro, and that if Rural/Metro must hire new personnel or retrain existing personnel to fill vacancies it will incur substantial expense in recruiting and training such personnel. The parties expressly recognize that should Executive compete with Rural/Metro in any manner whatsoever, it could seriously impair the goodwill and diminish the value of Rural/Metro’s business.

The parties acknowledge that this covenant has an extended duration; however, they agree that this covenant is reasonable and it is necessary for the protection of Rural/Metro.

For these and other reasons, and the fact that there are many other employment opportunities available to Executive if he should terminate, the parties are in full and complete agreement that the following restrictive covenants (which together are referred to as the “Covenant-Not-To-Compete”) are fair and reasonable and are freely, voluntarily and knowingly entered into. Further, each party has been given the opportunity to consult with independent legal counsel before entering into this Agreement.

B. Devotion to Employment.

Executive shall devote substantially all his business time and efforts to the performance of his duties on behalf of Rural/Metro. During his term of employment, Executive shall not at any time or place or to any extent whatsoever, either directly or indirectly, without the express written consent of Rural/Metro, engage in any outside employment, or in any activity competitive with or adverse to Rural/Metro’s business, practice or affairs, whether alone or as partner, officer, director, employee, shareholder of any corporation or as a trustee, fiduciary, consultant or other representative. This is not intended to prohibit Executive from engaging in nonprofessional activities such as personal investments or conducting to a reasonable extent private business affairs which may include other boards of directors’

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activity, as long as they do not conflict with Rural/Metro. Participation to a reasonable extent in civic, social or community activities is encouraged. Notwithstanding anything herein to the contrary, any non-Rural/Metro activities shall be conducted in compliance with Rural/Metro’s corporate governance policies and other policies and procedures as in effect from time to time.

C. Non-Solicitation of Clients.

During the term of Executive’s employment with Rural/Metro and for a period, after the termination of employment with Rural/Metro, equal to two (2) years (the “Non-Compete Period”), regardless of who initiates the termination and for whatever reason, Executive shall not directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, call upon, contact, encourage, handle or solicit client(s) of Rural/Metro with whom he has worked as an employee of Rural/Metro at any time prior to termination, or at the time of termination, for the purpose of soliciting or selling such customer the same, similar, or related services that he provided on behalf of Rural/Metro.

D. Non-Solicitation of Employees.

During the term of Executive’s employment with Rural/Metro and for the Non-Compete Period, regardless of who initiates the termination and for any reason, Executive shall not knowingly, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, seek to hire, and/or hire any of Rural/Metro’s personnel or employees for the purpose of having such employee engage in services that are the same, similar or related to the services that such employee provided for Rural/Metro.

E. Competing Business.

During the term of this Agreement and for the Non-Compete Period, regardless of who initiates the termination and for any reason, Executive shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, engage in the same or similar business as Rural/Metro, which would be in direct competition with any Rural/Metro line of business, in any geographical service area where Rural/Metro is engaged in business, or was considering engaging in business at any time prior to the termination or at the time of the termination. For the purposes of this provision, the term “competition” shall mean directly or indirectly engaging in or having a substantial interest in a business or operation which is, or will be, performing the same services provided by Rural/Metro.

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F. Extension of Period.

Executive agrees that the Non-Compete Period referred to in subsections C, D and E shall be extended for a period of time equal to the duration of any breach of this Agreement by Executive, but in no event longer than six (6) months.

G. Election to Shorten Period.

Executive may elect to shorten the Non-Compete Period referred to in subsections C, D and E to any period of at least twelve (12) months, provided that Executive is not in breach of such subsections at the time of such election. In order to make this election, Executive must provide Rural/Metro with written notice at least sixty (60) days prior to the expiration of the shortened period. As provided in Section 8, if Executive makes this election, any Severance Benefits provided by Section 8 will be discontinued as of the effective date of the election.

H. Automatic Reduction of Period.

The Non-Compete Period referred to in subsections C, D and E shall be shortened to twelve (12) months if Executive is not entitled to receive Severance Benefits pursuant to Section 8 at the time of his termination of employment.

I. Judicial Amendment.

If the scope of any provision of this Agreement is found by the Court to be too broad to permit enforcement to its full extent, then such provision shall be enforced to the maximum extent permitted by law. The parties agree that the scope of any provision of this Agreement may be modified by a judge in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. If any provision of this Agreement is found to be invalid or unenforceable for any reason, it shall not affect the validity of the remaining provisions of this Agreement.

J. Injunctive Relief, Damages and Forfeiture.

Due to the nature of Executive’s position with Rural/Metro, and with full realization that a violation of Sections 10 and 11 will cause immediate and irreparable injury and damage, which is not readily measurable, and to protect Rural/Metro’s interests, Executive understands and agrees that in addition to instituting legal proceedings to recover damages resulting from a breach of this Agreement, Rural/Metro may seek to enforce this Agreement with an action for injunctive relief, to cease or prevent any actual or threatened violation of this Agreement on the part of Executive. Likewise, Executive can seek injunctive relief for any action Executive may elect to bring relating to Sections 10 and 11.

Page 12 of 16

K. Survival.

The provisions of this Section 11 shall survive the termination of this Agreement.

12. BUSINESS EXPENSES.

Rural/Metro will reimburse Executive for any and all necessary, customary, and usual expenses, properly receipted in accordance with Rural/Metro’s policies, incurred by Executive on behalf of Rural/Metro.

13. AMENDMENTS.

This Agreement, the Executive’s Indemnity Agreement, Stock Option Agreements (if any), and the Executive’s Change of Control Agreement constitute the entire agreement between the parties as to the subject matter hereof, and all prior Employment Agreements are being terminated as of the Effective Date. Accordingly, there are no side agreements or verbal agreements other than those which are stated above. Any amendment, modification or change in this Agreement must be done so in writing and signed by both parties. Nothing in this Agreement is intended to alter or modify Executive’s Indemnity Agreement or Stock Option Agreements (if any), which shall continue in full force and effect following the execution of this Agreement.

14. SEVERABILITY.

In the event a court or arbitrator declares that any provision of this Agreement is invalid or unenforceable, it shall not affect or invalidate any of the remaining provisions. Further, the court shall have the authority to re-write that portion of the Agreement it deems unenforceable, to make it enforceable.

15. GOVERNING LAW.

The law of the State of Arizona shall govern the interpretation and application of all of the provisions of this Agreement.

16. DISPUTE RESOLUTION.

A. Mediation.

Any and all disputes arising under, pertaining to or touching upon this Agreement or the statutory rights or obligations of either party hereto, shall, if not settled by negotiation, be subject to non-binding mediation before an independent mediator selected by the parties pursuant to Section 16D. Notwithstanding the foregoing, either Executive or Rural/Metro may seek preliminary judicial relief based upon a belief that such action may be necessary to avoid irreparable damage during the pendency of

Page 13 of 16

the proceedings described in this Section 16. Any demand for mediation shall be made in writing and served upon the other party to the dispute, by certified mail, return receipt requested, at the business address of Rural/Metro, or at the last known residence address of Executive, respectively. The demand shall set forth with reasonable specificity the basis of the dispute and the relief sought. The mediation hearing will occur at a time and place convenient (and mutually agreeable) to the parties within thirty (30) days of the date of selection or appointment of the mediator.

B. Arbitration.

In the event that the dispute is not settled through mediation, the parties shall then proceed to binding arbitration before a single independent arbitrator selected pursuant to Section 18D. The mediator shall not serve as arbitrator. TO THE EXTENT ALLOWABLE UNDER APPLICABLE LAW, ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, BREACH OF CONTRACT OR POLICY, OR EMPLOYMENT TORT COMMITTED BY RURAL/METRO OR A REPRESENTATIVE OF RURAL/METRO, INCLUDING CLAIMS OF VIOLATIONS OF FEDERAL OR STATE DISCRIMINATION STATUTES OR PUBLIC POLICY, SHALL BE RESOLVED PURSUANT TO THIS AGREEMENT AND THERE SHALL BE NO RECOURSE TO COURT, WITH OR WITHOUT A JURY TRIAL. The arbitration hearing shall occur at a time and place convenient (and mutually agreeable to) the parties within thirty (30) days of selection or appointment of the arbitrator. If Rural/Metro has adopted a policy that is applicable to arbitrations with executives, the arbitration shall be conducted in accordance with said policy to the extent that the policy is consistent with this Agreement and the Federal Arbitration Act, 9 U.S.C. §§ 1-16. If no such policy has been adopted, the arbitration shall be governed by the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”) in effect on the date of the first notice of demand for arbitration. The arbitrator shall issue written findings of fact and conclusions of law, and an award, within thirty (30) days of the date of the hearing unless the parties otherwise agree.

C. Damages.

In cases of breach of contract or policy, damages shall be limited to contract damages. In cases of discrimination claims prohibited by statute, the arbitrator may direct payment consistent with the applicable statute. In cases of employment tort, the arbitrator may award punitive damages if proved by clear and convincing evidence. The arbitrator may award fees to the prevailing party and assess costs of the arbitration to the non-prevailing party. Issues of procedure, arbitrability, or confirmation of award shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16, except that Court review of the arbitrator’s award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury.

Page 14 of 16

D. Selection of Mediators or Arbitrators.

The parties shall select the mediator or arbitrator from a panel list made available by the AAA. If the parties are unable to agree to a mediator or arbitrator within thirty (30) days of receipt of a demand for mediation or arbitration, the mediator or arbitrator will be chosen by alternatively striking from a list of five (5) mediators or arbitrators obtained by Rural/Metro from AAA. Executive shall have the first strike.

17. MISCELLANEOUS.

A. Non-Waiver.

The failure in any one or more instances of a party to insist upon performance of any of the terms, covenants or conditions of this Agreement, to exercise any right or privilege conferred in this Agreement, or the waiver by said party of any breach of any of the terms, covenants or conditions of this Agreement, shall not be construed as a subsequent waiver of any such terms, covenants, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.

B. Construction; Counterparts.

This Agreement shall be construed fairly as to both parties and not in favor of or against either party, regardless of which party prepared the Agreement. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute but one instrument.

C. Notices.

All notices required or permitted to be given hereunder shall be deemed given when delivered in person, or three (3) business days after being placed in the hands of a courier service (e.g., DHL or Federal Express) prepaid or faxed provided that a confirming copy is delivered forthwith as herein provided, addressed, when to Executive, at the last known mailing address in Rural/Metro’s human resources files, and, when to Rural/Metro, at the mailing address of the corporate headquarters and to the attention of Rural/Metro’s Chief Executive Officer, and/or to such other respective addresses and/or addressees as may be designated by notice given in accordance with the provisions of this Section.

[Signature Page Immediately Follows]

Page 15 of 16

IN WITNESS WHEREOF, Rural/Metro and Executive have executed this Agreement.

EXECUTIVE	RURAL/METRO CORPORATION
/s/ Michael S. Zarriello	By:	/s/ Jack Brucker
Michael S. Zarriello		Jack Brucker
Senior Vice President and Chief Financial Officer		Chief Executive Officer and President
	By:	/s/ Mary Anne Carpenter
		Mary Anne Carpenter
		Chair, Compensation Committee

Page 16 of 16

EX-21

EXHIBIT 21

SUBSIDIARY LIST

AS OF SEPTEMBER 28, 2004

NAME	STATE	NAMES UNDERWHICH ENTITY DOES BUSINESS
Overall Parent Company:
Rural/Metro Corporation	Delaware
Subsidiaries of Rural/Metro Corporation (Delaware):
Aid Ambulance at Vigo County, Inc.	Indiana
Ambulance Transport Systems, Inc.	New Jersey
Donlock, Ltd.	Pennsylvania	Rural/Metro Medical Services, Ltd.; Rural/Metro Ambulance, Ltd.
Medical Emergency Devices and Services (MEDS), Inc.	Arizona	MEDS & Logo
Metro Care Corp.	Ohio	Rural/Metro Ambulance
MO-RO-KO, Inc.	Arizona
Multi-Care Medical Car Service, Inc.	New Jersey
Multi-Health Corp.	Florida
Myers Ambulance Service, Inc.	Indiana
North Miss. Ambulance Service, Inc.	Mississippi
Professional Medical Services, Inc.	Arkansas
RMFD of New Jersey, Inc.	Delaware
R/M Partners, Inc.	Delaware
Rural/Metro Communications Services, Inc.	Delaware
Rural/Metro Corporation	Arizona	Rural/Metro Ambulance Service, AMT, Arizona Medical Transport, Tri-City Med
Rural/Metro Logistics, Inc.	Delaware
Rural/Metro Mid-Atlantic, Inc.	Delaware
Rural/Metro of Colorado, Inc.	Delaware
Rural/Metro of Greater Seattle, Inc.	Washington	Rural/Metro Ambulance
Rural/Metro of Southern Ohio, Inc.	Ohio	Rural/Metro Ambulance
SW General, Inc.	Arizona	Southwest Ambulance; Southwest Transportation Services; Southwest Medical Services; KIDZULANCE
South Georgia Emergency Medical Services, Inc.	Georgia
Southwest Ambulance of Casa Grande, Inc.	Arizona	Southwest Ambulance and Rescue of Arizona; SWARA
Southwest Ambulance of New Mexico, Inc.	New Mexico	Southwest Ambulance of Doña Ana County; Southwest Ambulance of Las Cruses; Southwest General Services
Southwest General Services, Inc.	Arizona	CareTrans; CareTrans Medicoach Services; SW General Services
The Aid Company, Inc.	Indiana
Subsidiaries of Rural/Metro Corporation (Arizona):
R/M Management Co., Inc.	Arizona

Subsidiaries of Rural/Metro of Oregon, Inc.:
Valley Fire Service, Inc.	Delaware	Rural/Metro Fire Department; Valley Fire Service Fire Service Research Co. of Oregon
Subsidiaries of Rural/Metro of South Carolina, Inc.:
EMS Ventures of South Carolina, Inc.	South Carolina
Subsidiaries of Rural/Metro of South Dakota, Inc.:
Medical Transportation Services, Inc.	South Dakota
Subsidiaries of Medical Transportation Services, Inc.:
Sioux Falls Ambulance, Inc.	South Dakota	Rural/Metro Ambulance
Subsidiaries of Rural/Metro Texas Holdings, Inc.:
R/M of Texas G.P., Inc.	Delaware
Rural/Metro of Arlington, Inc.	Delaware
Rural/Metro of Texas, Inc.	Delaware	Rural/Metro Ambulance
Subsidiaries of R/M of Texas G.P., Inc.:
Rural/Metro of North Texas, L.P. (1%).	Delaware	Rural/Metro Ambulance
Rural/Metro of Texas, L.P. (1%)	Delaware	Rural/Metro Ambulance, L.P.
Subsidiaries of Rural/Metro of Texas, Inc.:
Rural/Metro of North Texas, L.P. (99%).	Delaware	Rural/Metro Ambulance
Rural/Metro of Texas, L.P. (99%)	Delaware	Rural/Metro Ambulance
Subsidiaries of Southwest Ambulance of Casa Grande, Inc.:
Southwest Ambulance and Rescue of Arizona, Inc.	Arizona	Southwest Ambulance and Rescue of Arizona; SWARA
Subsidiaries of Southwest General Services, Inc.:
Southwest General Services of Dallas, LLC (19.9%)	Delaware
Subsidiaries of The Aid Company, Inc.:
Rural/Metro of Indiana, L.P. (99%)	Delaware

LIMITED PARTNERSHIPS

NAME	STATE	NAMES UNDER WHICH ENTITY DOES BUSINESS
Rural/Metro Mid-South, L.P.	Delaware
Rural/Metro of Tennessee, L.P.	Delaware	Rural/Metro Ambulance
Rural/Metro of Indiana, L.P.	Delaware
Rural/Metro of Indiana II, L.P.	Delaware

2

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-76526, 33-80454, 33-88302, 333-2818, 333-07457, 333-62517, 333-62983, 333-64139, 333-68161, 333-49004, 333-61412, 333-76826), the Registration Statement on Form S-3 (No. 333-39453) and the Registration Statement on Form S-4 (No. 333-37393) of Rural/Metro Corporation of our report dated September 27, 2004 relating to the consolidated financial statements, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Phoenix, Arizona

September 27, 2004

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Jack E. Brucker, certify that:

1. I have reviewed this annual report on Form 10-K of Rural/Metro Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 27, 2004

/s/ Jack E. Brucker

President and Chief Executive Officer

Rural/Metro Corporation

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael S. Zarriello, certify that:

1. I have reviewed this annual report on Form 10-K of Rural/Metro Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 27, 2004

/s/ Michael S. Zarriello

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

Rural/Metro Corporation

EX-32.1

EXHIBIT 32.1

CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,

UNITED STATES CODE)

In connection with the Annual Report of Rural/Metro Corporation, a Delaware corporation (the “Company”) on Form 10-K for the period ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jack E. Brucker, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 27, 2004

/s/ Jack E. Brucker

Jack E. Brucker

President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,

UNITED STATES CODE)

In connection with the Annual Report of Rural/Metro Corporation, a Delaware corporation (the “Company”) on Form 10-K for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael S. Zarriello, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 27, 2004

/s/ Michael S. Zarriello

Michael S. Zarriello

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)