Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Nine months ended September 30, 2004 Compared to the nine months ended September 30, 2003

The following table sets forth the percentage relationships of expense items to revenue for the nine months ended September 30, 2004 and September 30, 2003:

                                                       2004     2003
                                                     ------    ------
Revenue                                               100.0%   100.0%
Operating expenses:
    Purchased transportation                           73.8     74.0
    Commissions                                        10.0     10.1
    Insurance and claims                                4.3      4.3
    Salaries, wages and other                           6.0      5.3
    Other operating expenses                            4.9      4.7
                                                     -------   ------
     Total operating expenses                          99.0     98.4
                                                      ------   ------
Operating income                                        1.0      1.6

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

The Company's operating revenues increased to $103.7 million for the nine months ended September 30, 2004 from $91.1 million for the same period in 2003. This is an increase of 13.8%. This increase is attributable to the continued growth of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.)and Keystone Logistics, Inc. The growth of these subsidiaries is primarily attributable to the addition of new terminals and growth of existing terminals.

Purchased transportation represents the amount an independent contractor is paid to haul freight and is primarily based on a contractually agreed- upon percentage of revenue generated by the haul for truck capacity provided by independent contractors. Purchased transportation is the largest component of operating expenses. Purchased transportation and commission expense increase or decrease in proportion to the revenue generated through independent contractors. Purchased transportation decreased slightly to 73.8% of revenue for the nine months ended September 30, 2004 from 74.0% for the nine months ended September 30, 2003. Many agents negotiate a combined percentage payable for purchased transportation and commission. The mix between the amounts of purchased transportation paid versus commissions paid may vary slightly based on agent negotiations with independent owner operators. However, in total, commissions and purchased transportation would typically be expected to remain relatively consistent as a percentage of revenue.

Commissions to agents and brokers are primarily based on contractually agreed-upon percentages of revenue. Commissions decreased slightly to 10.0% of revenue for the nine months ended September 30, 2004 from 10.1% of revenue for the nine months ended September 30, 2003. In total, purchased transportation and commissions were 83.8% of revenue in 2004 compared to 84.1% of revenue in 2003. The combined decrease is partly due to the increase of revenue by one of the Company's terminals that utilizes more employees than agents. Agents are paid commissions where as employees are paid wages.

Insurance and claims remained constant at 4.3% of revenue for the nine months ended September 30, 2004 and September 30, 2003. A majority of the insurance and claims expense is based on a percentage of revenue and, as a result, will increase or decrease on a consolidated basis with the Company's revenue. Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. A material increase in the frequency or severity of accidents or the unfavorable development of existing claims could adversely affect the Company's operating income.

Salaries, wages, and fringe benefits were 6.0% of revenue for the nine months ended September 30, 2004 compared to 5.3% of revenue for the nine months ended September 30, 2003. This increase of 0.7% can primarily be attributed to the additional personnel hired to accommodate the growth of expanding terminals that have not yet begun to produce at their full revenue potential.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Other operating expenses as a percentage of revenue increased slightly to 4.9% of revenue for the nine months ended September 30, 2004 from 4.7% for the nine months ended September 30, 2003. This increase is primarily due to increased costs associated with the opening of new offices. While not all operating expenses are directly variable with revenue, the increased revenue directly impacts several components of operating expenses due to the Company adding new locations.

Based on the changes in revenue and expenses described above, operating income decreased by $423,709. Operating income for the nine months ended September 30, 2004 was $1,053,946 compared to $1,477,655 for the nine months ended September 30, 2003.

Interest expense decreased by $57,398 in 2004. Interest expense for the nine months ended September 30, 2004 was $331,339 compared to interest expense of $388,737 for the nine months ended September 30, 2003.

This decrease in interest expense is primarily attributable to a decrease in the amount outstanding on the Company's line of credit. The rate on the Company's loan with US Bank is currently based on certain financial covenants and may range from prime to prime less .5%. At September 30, 2004, the interest rate charged on the loan with US Bank was prime (4.75%). At September 30, 2003 the interest rate charged on the loan with US Bank was 4.0%.

Non-operating (income) expense, exclusive of interest expense, includes income from rental property and storage fees. Non-operating (income) expense, exclusive of interest expense, was ($231,976) for the nine months ended September 30, 2004 versus ($277,449) for the nine months ended September 30, 2003. This is a decrease of $45,473 and is primarily attributable to a decrease in storage fee income associated with one of the Company's divisions located in Laredo, Texas.

Minority interest expense of $114,794 and $100,746 for the nine months ended September 30, 2004 and 2003, respectively, is the result of an agreement with certain key employees of Carolina National, a wholly owned subsidiary of the Company. Under the terms of this agreement, these employees will earn up to a 40% ownership interest in Carolina over a three-year period (see note 4 to condensed consolidated financial statements).

As a result of the factors described above, net income for the nine months ended September 30, 2004 was $839,789 compared with $1,265,621 for the same period in 2003.

                                                       2004     2003
                                                     ------    ------
Revenue                                               100.0%   100.0%
Operating expenses:
    Purchased transportation                           73.9     73.8
    Commissions                                         9.5     10.5
    Insurance and claims                                4.0      4.6
    Salaries, wages and fringe benefits                 6.0      5.4
    Other operating expenses                            5.0      4.7
                                                     -------   ------
     Total operating expenses                          98.4     99.0
                                                      ------   ------
Operating income                                        1.6      1.0

The Company's operating revenues increased to $37.0 million for the three months ended September 30, 2004 from $30.9 million for the same period in 2003. This is an increase of 19.8%. This increase is attributable to the continued growth of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.) and Keystone Logistics, Inc. The growth of these subsidiaries is attributable to both the addition of new terminals and growth of existing terminals.

Purchased transportation represents the amount an independent contractor is paid to haul freight and is primarily based on a contractually agreed-upon percentage of revenue generated by the haul for truck capacity provided by independent contractors. Purchased transportation is the largest component of operating expenses. Purchased transportation and commission expense increase or decrease in proportion to the revenue generated through independent contractors. Purchased transportation increased slightly to 73.9% of revenue for the three months ended September 30, 2004 from 73.8% for the three months ended September 30, 2003. The slight increase was more than offset by the decrease in commissions. Many agents negotiate a combined percentage payable for purchased transportation and commission. The mix between the amounts of purchased transportation paid versus commissions paid may vary slightly based on agent negotiations with independent owner operators. However, in total, commissions and purchased transportation would typically be expected to remain relatively consistent as a percentage of revenues.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Commissions to agents and brokers are primarily based on contractually agreed-upon percentages of revenue. Commissions decreased to 9.5% of revenue for the three months ended September 30, 2004 from 10.5% of revenue for the three months ended September 30, 2003. As previously described, the decrease in commissions of 1.0% of revenue was partially offset by the increase in purchased transportation. In addition, commissions as a percent of revenue have decreased slightly due to the increase of revenue by one of the Company's terminals that utilizes more employees than agents. Agents are paid commissions where as employees are paid wages.

Insurance and claims decreased to 4.0% of revenue for the three months ended September 30, 2004 from 4.6% of revenue for the three months ended September 30, 2003. A majority of the insurance and claims expense is based on a percentage of revenue and, as a result, will increase or decrease on a consolidated basis with the Company's revenue. Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. A material increase in the frequency or severity of accidents or the unfavorable development of existing claims could adversely affect the Company's operating income. The decrease of 0.6% of revenue can be attributed to the decrease in claims incurred by certain operations of the Company.

Salaries, wages, and fringe benefits were 6.0% of revenue for the three months ended September 30, 2004 compared to 5.4% of revenue for the three months ended September 30, 2003. This increase of 1.6% can partially be attributed to the additional personnel hired to accommodate the growth of expanding terminals.

Other operating expenses as a percentage of revenue increased slightly to 5.0% for the three months ended September 30, 2004 from 4.7% for the same period in 2003. While not all operating expenses are directly variable with revenues, the increased revenue directly impacts several components of operating expenses due to the Company adding new locations.

Based on the changes in revenue and expenses described above, operating income increased by $254,313. Operating income for the three months ended September 30, 2004 was $578,349 compared to $324,036 for the three months ended September 30, 2003.

Interest expense increased by $13,561, from $134,314 for the three months ended September 30, 2004 to $120,753 for the three months ended September 30, 2003. This increase in interest expense is primarily attributable to an increase in interest rates charged on the Company's line of credit. The rate on the Company's loan with US Bank is currently based on certain financial covenants and may range from prime to prime less .5%. At September 30, 2004, the interest rate charged on the loan with US Bank was 4.75%. At September 30, 2003 the interest rate on this loan was 4.00%.

Non-operating (income) expense, exclusive of interest expense, includes income from rental property and storage fees as well as gain on disposal of equipment. Non-operating (income) expense, exclusive of interest expense, was ($111,056) for the three months ended September 30, 2004 versus ($74,149) for the three months ended September 30, 2003. The decrease is partially attributed to a decrease in storage fee income associated with one of the Company's divisions located in Laredo, Texas. The decrease in non-operating (income) was offset by a gain on the disposal of equipment of approximately $50,000.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Minority interest expense of $47,124 and $39,056 for the three months ended September 30, 2004 and 2003, respectively, is the result of an agreement with certain key employees of Carolina National, a wholly owned subsidiary of the Company. Under the terms of this agreement, these employees will earn up to a 40% ownership interest in Carolina over a three-year period (see note 4 to condensed consolidated financial statements).

As a result of the factors described above, net income for the three months ended September 30, 2004 was $507,967 compared with $238,376 for the same period in 2003.

Liquidity and Capital Resources

Net cash provided by operating activities decreased 0.6 million from $1,128,846 for the nine months ended September 30, 2003 to $566,212 for the nine months ended September 30, 2004. The decrease in net cash provided by operating activities is attributable to decreased profitability during 2004 combined with increased working capital needs to fund continued growth of the Company. As a result of decreased profitability, cash provided by operations before changes in working capital decreased $0.5 million from $2.3 million at September 30, 2003 to $1.8 million at September 30, 2004. Much of the decreased profitability is due to costs incurred related to the start-up of new locations which are not yet at their full revenue potential. In addition, the Company continues to experience growth and therefore a significant amount of the cash generated from operations is used to fund this growth and the related working capital needs. Cash used to fund these working capital needs increased approximately $0.1 million from $1.2 million for the nine months ended September 30, 2003 to $1.3 million for the nine months ended September 30, 2004 as the impact of increased accounts receivable was only partially offset by increased accounts payable and accrued expenses. Typically, the Company pays independent owner operators and agents in 7 - 15 days. However, the Company's customers typically pay in 30 - 45 days.

Net cash provided by (used in) investing activities was $25,462 for the nine months ended September 30, 2004 compared to ($135,374) for the nine months ended September 30, 2003. Net cash provided by investing activities increased due to the sale of certain trailers at one of the Company's operations that was closed in 2004.

Net cash used in financing activities decreased $401,798 from $993,472 for the nine months ended September 30, 2003 to $591,674 for the nine months ended September 30, 2004. The cash used in financing activities for 2004 is primarily due to the principal payments of long-term debts.

Effective October 1, 2003, the Company's Lender agreed to amend the existing bank agreement to increase the Company's revolving line of credit from $8.5 million to $10.0 million. The maturity date of the Company's revolving line of credit was also extended from October 1, 2003 to October 1, 2005. Advances under this revolving line of credit are limited to 75% of eligible accounts receivable. The interest rate is based upon certain financial covenants and may range from prime to prime less 0.50%. At September 30, 2004, the interest rate on this line of credit was at prime (4.75%). The Company's accounts receivable, property, and other assets collateralize advances under the agreement. Unused availability under this line of credit was approximately $5.2 million at September 30, 2004. The

Liquidity and Capital Resources (Continued)

Chief Executive Officer and Chief Financial Officer of the Company guarantee borrowings of up to $1 million. At September 30, 2004, the outstanding borrowings on this line of credit were $4.8 million.

The Company is dependent upon the funds available under its line of credit agreement for liquidity. As long as the Company can fund 25% of its accounts receivable from funds generated internally from operations or otherwise, this facility has historically provided the Company sufficient liquidity to meet its needs on an ongoing basis.

In October 2003, the Company's lender granted them a new equipment line of credit in the amount of $500,000. Although the Company has not utilized this new equipment line of credit, the interest rate will range from prime to prime less 0.50% per annum based on certain financial covenants. This new equipment line of credit carries a maturity date of October 1, 2005.

The line of credit and equipment loans are subject to termination upon various events of default, including failure to remit timely payments of interest, fees, and principal, any adverse change in the business of the Company, or failure to meet certain financial covenants. The required financial covenants include: minimum net worth requirements, total debt service coverage ratio, capital expenditure limitations, and prohibition of additional indebtedness without prior authorization.