The following discussion is intended to provide the reader with information that will assist in understanding our financial statements including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our results of operations. This discussion should be read in conjunction with our financial statements as of September 30, 2004 and the nine month period then ended and the notes accompanying those financial statements.

Overview

We provide housekeeping, laundry, linen, facility maintenance and food services to the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals. We believe that we are the largest provider of housekeeping and laundry services to the long-term care industry in the United States. Although we do not directly participate in any government reimbursement programs, our clients are subject to government regulation. Therefore, they are directly effected by any legislation relating to Medicare or Medicaid programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we assume both the management and payroll responsibility for the respective service segment’s employees. We provide services on the basis of a management only agreement for a limited number of clients. Our agreements with clients typically provide for a one year service term, cancelable by either party upon 30 or 90 days’ notice after the initial 90-day period.

Additionally, we operate two wholly owned subsidiaries. HCSG Supply, Inc. purchases, warehouses and distributes our supplies and equipment used in providing our services. Huntingdon Holdings, Inc. invests our cash and cash equivalents.

Consolidated Operations

Revenues for the quarter ended September 30, 2004 increased 17.2% or $16,445,719 to $112,324,057 as compared to $95,878,338 in the corresponding 2003 quarter.

The Housekeeping services segment’s 2004 third quarter revenues increased 12.3% to $90,190,386 compared to the third quarter 2003 segment revenues of $80,301,521. This growth is primarily a result of a net increase in service agreements entered into with new clients.

The Food service segment’s 2004 third quarter revenues increased approximately 41.1% to $23,227,820 as compared to the third quarter 2003 revenues of $16,457,117. This growth is a result of providing this service to additional existing Housekeeping services segment’s clients.

Revenues for the nine month period ended September 30, 2004 increased 18.4% or $51,219,959 to $329,435,363 as compared to $278,215,404 in the corresponding 2003 period.

The Housekeeping services segment’s 2004 nine months period revenues increased to $266,755,677, or 13.9% from the comparable 2003 period’s revenues of $234,243,575. This growth is primarily a result of a net increase in service agreements entered into with new clients.

The Food services segment’s 2004 nine months period revenues increased approximately 44.1% to $63,876,964 from the comparable 2003 period’s revenues of $44,319,601. This growth is a result of providing this service to additional existing Housekeeping service’s segment clients.

Although there can be no assurance thereof, we anticipate future revenue growth. We believe that such growth will decrease, as a percentage of revenue, since such growth will be measured against our increasing revenue base.

The following table sets forth, for the periods indicated, the percentage which certain items bear to revenues:

Major client

We have one client, a nursing home chain, which in the nine month periods ended September 30, 2004 and September 30, 2003 accounted for approximately 20% and 23%, respectively, of consolidated revenues. In the nine months ended September 30, 2004 we derived approximately 19% and 27%, respectively, of the Housekeeping services and Food services segments’ revenues from such client. Although we expect to continue our relationship with this client, the loss of such client would adversely affect the operations of our two operating segments.

2004 Third Quarter Compared with 2003 Third Quarter

Cost of services provided as a percentage of revenues decreased to 87.8% in the third quarter of 2004 compared to 88.0 % in the corresponding 2003 quarter. The primary factors affecting this decrease are as follows: an increase of 1.5% in the cost of supplies consumed in providing services which was primarily attributable to increased costs associated with the Food services segment’s growth. Offsetting this increase was a decrease of 1.5% in workers compensation insurance. This decrease in workers’ compensation insurance is a result of a current reduction in average claim cost.

Selling, general and administrative expenses as a percentage of revenue decreased to 7.1% in the 2004 third quarter compared to 7.7% in the 2003 third quarter. This is primarily attributable to our ability to control these expenses, as well as comparing these expenses to a greater revenue base in the current quarter.

Our effective income tax rate increased to 38% in the 2004 third quarter compared to 37.5% in the 2003 third quarter. The increase is primarily attributable to graduated income tax rates being applied against increased levels of taxable income. Our effective income tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

As a result of the matters discussed above, net income for the three month period ended September 30, 2004 increased to 3.3% as a percentage of revenue, compared to 2.9% in the 2003 comparable three month period.

2004 Nine Month Period Compared with 2003 Nine Month Period

Cost of services provided as percentage of revenues decreased to 87. 8% in the 2004 nine month period compared to 88.0%in the 2003 nine month period. The primary factors affecting this change when comparing the two nine month periods were an increase of 1.6% in the cost of supplies consumed in providing services, which was primarily attributable to increased costs associated with the Food services segment’s growth. This increase was offset by decreases of .7%,.6% and .5% in workers’ compensation insurance, bad debt provision and labor costs, respectively. The decrease in labor costs resulted primarily from efficiencies achieved in managing the Housekeeping services segment’s labor. The decrease in workers’ compensation insurance is a result of a current reduction in average claim cost. The decrease in the bad debt provision is a result of improved collection experience. Although there can be no assurance thereof, we believe that the cost of services provided, as a percentage of revenues, for the remainder of 2004 will approximate the same percentage as recognized in the first nine months of 2004.

Selling, general and administrative expenses as a percentage of revenue decreased in the nine month period ended September 30, 2004 to 7.1% from 7.7% in the comparable 2003 period. This is primarily attributable to our ability to control these expenses, as well as comparing these expenses to a greater revenue base in the current nine month period.

Our 2004 nine month period effective income tax rate decreased slightly to 38.0% from 38.5% in the comparable 2003 nine month period. The decrease primarily results from a reduction in our state and local tax liability. The effective income tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

As a result of the matters discussed above, net income for the nine month period ended September 30, 2004 increased to 3.2% as a percentage of revenue compared to 2.9% in the comparable 2003 nine month period.

We consider the two policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on our judgment. Therefore, it should be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For these policies, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

The two policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in our Annual Report for the year ended December 31, 2003 which contain accounting policies and other disclosures required by generally accepted accounting principles.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The allowance for doubtful accounts is evaluated based on our periodic review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those in bankruptcy, those who have terminated service agreements and slow payers experiencing financial difficulties. In making credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risks associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation, and monitor accounts to minimize the risk of loss.

In accordance with the risk of extending credit, we regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate will provide in our Allowance for Doubtful Accounts for such receivables. We generally follow a policy of reserving for receivables from clients in bankruptcy, clients with which we are in litigation for collection and other certain slow paying clients. The reserve is based upon our estimates of ultimate collectibility. Correspondingly, once our recovery of a receivable is determined through either litigation, bankruptcy proceedings or negotiation at less than the recorded amount on our balance sheet, we will charge-off the applicable amount to the Allowance for Doubtful Accounts.

Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed under Liquidity and Capital Resources below, and as further described in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2003 in Part I thereof under “Government Regulation of Clients” and “Service Agreements/Collections”, change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, it would have a material adverse affect on our results of operations and financial condition.

Accrued Insurance Claims

We have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance. Under these plans, pre-determined loss limits are arranged with an insurance company to limit both our per occurrence cash outlay and annual insurance plan cost.

For workers’ compensation, we record a reserve based on the present value of future payments, including an estimate of claims incurred but not reported, that are developed as a result of a review of our historical data, open claims and actuarial analysis done by an independent insurance specialist. The present value of the payout is determined by applying an 8% discount factor over the estimated remaining pay-out period.

For general liability, we record a reserve for the estimated amounts to be paid for known claims.

We regularly evaluate our claims’ pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims’ estimate. Our evaluations are based primarily on current information derived from reviewing our claims’ experience and industry trends. In the event that our claims’ experience and/or industry trends result in an unfavorable change, it would have an adverse affect on our results of operations and financial condition.

At September 30, 2004 we had cash and cash equivalents of $71,190,394 and working capital of $122,542,728 compared to December 31, 2003 cash and cash equivalents, and working capital of $64,180,697 and $113,414,509, respectively. We view our cash and cash equivalents of $71,190,394 at September 30, 2004 as our principal measure of liquidity. Our current ratio at September 30, 2004 increased to 6.4 to 1 from 5.6 to 1 at December 31, 2003.

The net cash provided by our operating activities was $14,521,089 for the nine month period ended September 30, 2004. The principal sources of net cash flows from operating activities for the nine month period ended September 30, 2004 were net income, including non-cash charges to operations for depreciation and bad debt provisions. Additionally, operating activities’ cash flows were increased by a $1,473,489 net decrease in accounts and notes receivable and long-term notes receivable due primarily to improved collections experience. Operating activities cash flows were also increased by the timing of payments under the Company’s various insurance plans of $1,401,057. The operating activities that used the largest amount of cash during the nine month period ended September 30, 2004 were decreases in accrued payroll and accrued and withheld payroll taxes of $3,149,827, and prepaid expenses and other assets of $1,275,792. The changes resulted primarily from the timing of such payments.