10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 0-120152

HEALTHCARE SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)
23-2018365
(IRS Employer Identification
number)

3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania
(Address of principal executive office)
19020
(Zip code)

Registrant’s telephone number, including area code: 215-639-4274

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 Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such returns), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value: 27,452,000 shares outstanding as of October 25, 2006.

INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	2
	Consolidated Statements of Income for the Three Months Ended Sept 30, 2006 and Sept 30, 2005	3
	Consolidated Statements of Income for the Nine Months Ended Sept 30, 2006 and Sept 30, 2005	4
	Consolidated Statements of Cash Flows for the Nine Months ended Sept 30, 2006 and Sept 30, 2005	5
	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2006	6
	Notes To Consolidated Financial Statements	7 – 16
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results Of Operations	17 – 31
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	32
Item 4.	Controls and Procedures	32
Part II.	Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	35

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets

	(Unaudited) September 30, 2006			December 31, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	76,399,000		$	91,005,000
Accounts and notes receivable, less allowance for doubtful
accounts of $3,403,000 in 2006 and $2,275,000 in 2005		77,274,000			59,197,000
Inventories and supplies		12,421,000			11,729,000
Deferred income taxes		818,000			355,000
Prepaid expenses and other		4,026,000			3,330,000
Total current assets		170,938,000			165,616,000
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations		1,785,000			2,416,000
Housekeeping and office equipment		17,834,000			15,141,000
Autos and trucks		79,000			79,000
		19,698,000			17,636,000
Less accumulated depreciation		14,643,000			12,892,000
		5,055,000			4,744,000
GOODWILL AND OTHER INTANGIBLE ASSETS- Less accumulated amortization of $1,743,000 in 2006 and 2005		19,341,000			1,612,000
NOTES RECEIVABLE- long term portion, net of discount		4,856,000			4,555,000
DEFERRED COMPENSATION FUNDING		6,704,000			5,626,000
DEFERRED INCOME TAXES- long term portion		7,166,000			6,181,000
OTHER NONCURRENT ASSETS		104,000			96,000
TOTAL ASSETS	$	214,164,000		$	188,430,000
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable	$	10,304,000		$	8,760,000
Accrued payroll, accrued and withheld payroll taxes		15,282,000			7,792,000
Other accrued expenses		1,799,000			657,000
Income taxes payable		276,000			1,467,000
Accrued insurance claims		4,809,000			4,405,000
Total current liabilities		32,470,000			23,081,000
ACCRUED INSURANCE CLAIMS- long term portion		11,220,000			10,277,000
DEFERRED COMPENSATION LIABILITY		8,604,000			6,909,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000 shares authorized,
28,931,000 shares issued in 2006 and 28,677,000 in 2005		289,000			287,000
Additional paid in capital		57,561,000			48,603,000
Retained earnings		121,818,000			112,299,000
Common stock in treasury, at cost, 1,515,000 shares in 2006 and
1,616,000 in 2005		(17,798,000	)		(13,026,000	)
Total stockholders’ equity		161,870,000			148,163,000
TOTAL LIABILITITIES AND STOCKHOLDERS’ EQUITY	$	214,164,000		$	188,430,000

See accompanying notes.

-2-

Consolidated Statements of Income

(Unaudited)

	For the Three Months Ended Sept 30,
	2006		2005
Revenues	$	130,083,000	$	117,684,000
Operating costs and expenses:
Costs of services provided		112,195,000		102,884,000
Selling, general and administrative		8,767,000		8,024,000
Other Income :
Investment and interest income		1,298,000		923,000
Income before income taxes		10,419,000		7,699,000
Income taxes		3,855,000		2,925,000
Net Income	$	6,564,000	$	4,774,000
Basic earnings per common share	$	0.24	$	0.18
Diluted earnings per common share	$	0.23	$	0.17
Cash dividends per common share	$	0.12	$	0.08
Basic weighted average number of common shares outstanding		27,460,000		27,079,000
Diluted weighted average number of common shares outstanding		28,760,000		28,414,000

See accompanying notes.

-3-

Consolidated Statements of Income

(Unaudited)

	For the Nine Months Ended September 30,
	2006		2005
Revenues	$	371,841,000	$	348,426,000
Operating costs and expenses:
Costs of services provided		320,220,000		304,039,000
Selling, general and administrative		25,781,000		24,562,000
Other Income :
Investment and interest income		3,617,000		2,142,000
Income before income taxes		29,457,000		21,967,000
Income taxes		10,900,000		8,347,000
Net Income	$	18,557,000	$	13,620,000
Basic earnings per common share	$	0.68	$	0.51
Diluted earnings per common share	$	0.65	$	0.48
Cash dividends per common share	$	0.33	$	0.21
Basic weighted average number of common shares outstanding		27,399,000		26,861,000
Diluted weighted average number of common shares outstanding		28,691,000		28,286,000

See accompanying notes.

-4-

	September 30,
	2006			2005
Cash flows from operating activities:
Net Income	$	18,557,000		$	13,620,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,408,000			1,400,000
Bad debt provision		725,000			875,000
Deferred income taxes benefits		(1,246,000	)		(616,000	)
Unrealized gain on deferred compensation fund investments		(544,000	)		(469,000	)
Changes in operating assets and liabilities:
Accounts and notes receivable		(8,714,000	)		(4,465,000	)
Inventories and supplies		(622,000	)		(442,000	)
Notes receivable- long term portion		(301,000	)		1,472,000
Deferred compensation funding		(534,000	)		(593,000	)
Accounts payable and other accrued expenses		(755,000	)		1,263,000
Accrued payroll, accrued and withheld payroll taxes		7,048,000			7,203,000
Accrued insurance claims		953,000			561,000
Deferred compensation liability		1,694,000			1,358,000
Income taxes payable		(894,000	)		136,000
Prepaid expenses and other assets		(109,000	)		(582,000	)
Net cash provided by operating activities		16,666,000			20,721,000
Cash flows from investing activities:
Disposals of fixed assets		122,000			40,000
Cash paid for acquisition		(9,678,000	)		—
Additions to property and equipment		(1,458,000	)		(1,455,000	)
Net cash used in investing activities		(11,014,000	)		(1,415,000	)
Cash flows from financing activities:
Treasury stock transactions in benefit plans		(164,000	)		(174,000	)
Dividends paid		(9,038,000	)		(5,641,000	)
Acquisition of treasury stock		(8,227,000	)		(3,857,000	)
Repayments of debt assumed in acquisition		(6,163,000	)		—
Reissuance of treasury stock pursuant to Dividend
Reinvestment Plan		31,000			24,000
Proceeds from the exercise of stock options		2,296,000			4,278,000
Tax benefit of stock option transactions		1,007,000			2,920,000
Net cash used in financing activities		(20,258,000	)		(2,450,000	)
Net increase (decrease) in cash and cash equivalents		(14,606,000	)		16,856,000
Cash and cash equivalents at beginning of the period		91,005,000			74,847,000
Cash and cash equivalents at end of the period	$	76,399,000		$	91,703,000
Supplementary Cash Flow Information:
Income taxes cash payments, net of refunds	$	11,966,000		$	4,908,000
Issuance of 369,000 shares of Common Stock related to acquisition	$	8,517,000		$	—
Issuance of 64,000 shares of Common Stock in 2006 and 90,000 shares of Common Stock in 2005 pursuant to Employee Stock Plans	$	728,000		$	643,000

See accompanying notes.

-5-

Consolidated Statements of Stockholders’ Equity

(Unaudited)

					For the Nine Months Ended September 30, 2006
	Common Stock				Additional Paid-in		Retained			Treasury			Stockholders'
	Shares		Amount		Capital		Earnings			Stock			Equity
Balance, December 31, 2005		28,677,000	$	287,000	$	48,603,000	$	112,299,000			($13,026,000	)	$	148,163,000
Net income for the period								18,557,000						18,557,000
Exercise of stock options and other share-based compensation, net of 3,000 shares tendered for payment		254,000		2,000		2,294,000								2,296,000
Tax benefit arising from stock option transactions						1,007,000								1,007,000
Acquisition of treasury stock (335,000 shares)											(8,227,000	)		(8,227,000	)
Shares issued pursuant to acquisition (369,000 shares)						5,430,000					3,087,000			8,517,000
Shares purchased and shares sold in employee Deferred
Compensation Plan and other benefit plans (2,000 shares)											(164,000	)		(164,000	)
Shares issued pursuant to Employee Stock Plans (64,000 shares)						209,000					519,000			728,000
Cash dividends - $.33 per common share								(9,038,000	)					(9,038,000	)
Shares issued pursuant to Dividend Reinvestment Plan (2,000 shares)						18,000					13,000			31,000
Balance, September 30, 2006		28,931,000	$	289,000	$	57,561,000	$	121,818,000			($17,798,000	)	$	161,870,000

See accompanying notes.

-6-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Reporting

The accompanying financial statements are unaudited and do not include certain information and note disclosures required by accounting principles generally accepted in theUnited States for complete financial statements. However, in our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 2005 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 2005. The financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005. The results of operations for either the quarter or the nine month periodended September 30, 2006 are not necessarily indicative of the results that may be expected for the full fiscal year.

Inventories and supplies include housekeeping, linen and laundry supplies, as well as food provisions. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized over a 24 month period.

Note 2 - Acquisition

On September 18, 2006, effective as of August 31, 2006, our wholly-owned subsidiary HCSG Merger, Inc acquired 100% of the common stock of Summit Services Group, Inc (“Summit”) in a transaction accounted for under the purchase method of accounting. Summit is a provider of professional housekeeping, laundry and food services to long-term care and related facilities. We believe the acquisition of Summit expands and compliments our position of being the largest provider of such services to the long-term care industry in the United States. In conjunction with the acquisition, we paid approximately $9,500,000 in cash, issued approximately 369,000 shares of our common stock to the selling shareholders of Summit (valued at approximately $8,517,000). Additionally, we estimate that we will incur transactions costs of approximately $217,000 (some of which was paid at September 30, 2006). In addition to the consideration paid, certain former shareholder/employees of Summit entered into employment agreements with us pursuant to which each former shareholder/employee is to receive a stated annual salary.

-7-

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of August 31, 2006, the effective date of the acquisition:

Accounts and notes receivable, net	$	10,441,000
Other assets		742,000
Fixed assets and inventory		452,000
Goodwill and Other Intangible Assets		17,728,000
Total assets acquired		29,363,000
Accounts payable, accrued expenses and other liabilities		( 3,776,000	)
Loans payable		( 7,393,000	)
Total purchase price	$	18,194,000

This allocation is subject to revision pending the valuation to be performed by an independent third party engaged by the Company. Our current allocation of the purchase price to assets acquired and liabilities assumed is based on preliminary estimates and certain assumptions that we believe are reasonable under the circumstances. At this time, the excess of the acquisition cost over the net of amounts assigned to the fair value of the assets acquired and the liabilities assumed is recorded as Goodwill and Other Intangible Assets. The Goodwill and Other Intangible Assets are currently deemed to have an indefinite life, and accordingly, are not being amortized. It is believed that during the 2006 fourth quarter, the independent third party will complete its analysis and issue a report on the valuation of the assets acquired and liabilities assumed. Pursuant to that report, we will reclassify some assets from Goodwill and Other Intangible Assets to specifically identified intangible assets which will have a definite life and be subject to amortization over such life. We do not believe that any amortization, resulting from a reclassification in the 2006 fourth quarter of such intangible assets, applicable to the 2006 third quarter would be material to the 2006 third quarter results of operations. The remaining intangible assets, which have an indefinite life and are accordingly not amortized, will be subject to periodic impairment testing at future periods in accordance with SFAS No. 142 (“Goodwill and Other Intangible Assets”).

Our consolidated financial statements for the three and nine month periods ended September 30, 2006 include Summit’s results of operations subsequent to August 31, 2006. During this period, the operations of Summit contributed approximately $4,000,000 of revenues and $124,000 of net income. Accordingly, Summit’s results of operations are included in the appropriate operating segment reporting. Such results of Summit were not material to either of our two operating segments during either of the three or nine month periods ended September 30, 2006.

Supplemental pro forma information reflecting the acquisition of Summit as if it occurred on January 1, 2005 has not been provided due to the fact that this is not a material transaction.

-8-

Note 3 - Other Contingencies

We have a $25,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At September 30, 2006 and December 31, 2005, there were no borrowings under the line of credit. However, we had outstanding at such dates $24,725,000 and $17,925,000, respectively, of irrevocable standby letters of credit which relate to payment obligations under our insurance programs. As a result of the letters of credit issued, the amount available under the line of credit was reduced by $24,725,000 and $17,925,000 at September 30, 2006 and December 31, 2005, respectively. The line of credit requires us to satisfy two financial covenants. We were in compliance with the financial covenants at both September 30, 2006 and December 31, 2005 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2007. We believe the line of credit will be renewed at that time.

We provide our services in 47 states and we are subject to numerous local taxing jurisdictions within those states. Consequently, the taxability of our services is subject to various interpretations within these jurisdictions. In the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services, which may result in additional tax liabilities.

At both September 30, 2006 and December 31, 2005 we have unsettled tax assessments from a state taxing authority of $550,000 ($358,000, net of federal income taxes). With respect to these assessments, we have recorded a reserve at September 30, 2006 of $275,000 ($175,000 net of federal income taxes) and at December 31, 2005 of $155,000 ($100,000 net of federal income taxes).

In other tax matters, because of the uncertainties related to both the probable outcome and amount of probable assessment due, we are unable to make a reasonable estimate of a liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse affect on our consolidated financial position or results of operations.

We are involved in miscellaneous claims and litigation arising in the ordinary course of business. We believe that these matters, taken individually or in the aggregate, would not have a material adverse effect on our financial position or consolidated results of operations.

The Balance Budget Act of 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998, of a Medicare Prospective Payment System for skilled nursing facilities which significantly changed the manner and the amounts of reimbursement they receive. Many of our clients’ revenues are highly contingent on Medicare and Medicaid reimbursement funding rates. Therefore, they have been and continue to be adversely affected by changes in applicable laws and regulations, as well as other trends in the long-term care industry. This has resulted in certain of our clients filing for bankruptcy protection. Others may follow. These factors, in addition to delays in payments from clients, have resulted in and could continue to result in significant additional bad debts in the near future.

-9-

Note 4 - Segment Information

Reportable Operating Segments

We manage and evaluate our operations in two reportable segments. The two reportable segments are Housekeeping (housekeeping, laundry, linen and other services), and Food (food services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of service provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respective segment’s services. We consider the various services provided within Housekeeping to be one reportable operating segment since such services are rendered pursuant to a single service agreement and the delivery of such services is managed by the same management personnel.

Differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions, as well as transactions between reportable segments and our warehousing and distribution subsidiary. The subsidiary’s transactions with reportable segments are made on a basis intended to reflect the fair market value of the goods transferred. Additionally, included in the differences between the reportable segments’ operating results and other disclosed data are amounts attributable to our investment holding company subsidiary. This subsidiary does not transact any business with the reportable segments. Segment amounts reported are prior to any elimination entries made in consolidation.

Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both categories, are earned in one geographic area, the United States. Food provides services solely in the United States. The acquisition of Summit did not alter the above geographical area percentages.

	Housekeeping services		Food services		Corporate and eliminations			Total
Quarter Ended Sept 30, 2006
Revenues	$	105,053,000	$	26,403,000	$	( 1,373,000	)	$	130,083,000
Income before income taxes	$	9,282,000	$	795,000	$	342,000	(1)	$	10,419,000
Quarter Ended Sept 30, 2005
Revenues	$	95,155,000	$	23,772,000	$	( 1,243,000	)	$	117,684,000
Income before income taxes	$	7,738,000	$	477,000	$	( 516,000	)(1)	$	7,699,000
Nine Months Ended Sept 30, 2006
Revenues	$	298,203,000	$	74,115,000	$	( 477,000	)	$	371,841,000
Income before income taxes	$	28,133,000	$	2,411,000	$	( 1,087,000	)(1)	$	29,457,000
Nine Months Ended Sept 30, 2005
Revenues	$	279,519,000	$	69,310,000	$	( 403,000	)	$	348,426,000
Income before income taxes	$	24,171,000	$	1,907,000	$	( 4,111,000	)(1)	$	21,967,000

(1) represents primarily corporate office cost and related overhead, as well as consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments.

-10-

Total Revenues from Clients

The following revenues earned from clients differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposes by management. We earned total revenues from clients in the following service categories:

	For the Quarter Ended Sept 30,
	2006		2005
Housekeeping services	$	74,352,000	$	66,291,000
Laundry and linen services		29,382,000		27,588,000
Food Services		25,727,000		23,245,000
Maintenance services and Other		622,000		560,000
	$	130,083,000	$	117,684,000

	For the Nine Months Ended Sept 30,
	2006		2005
Housekeeping services	$	210,699,000	$	196,235,000
Laundry and linen services		86,353,000		82,047,000
Food Services		72,937,000		68,312,000
Maintenance services and Other		1,852,000		1,832,000
	$	371,841,000	$	348,426,000

Major Client

We have one client, a nursing home chain (the “Major Client”), which accounted for 19% of total revenues in each of the nine month periods ended September 30, 2006 and September 30, 2005. Additionally, in the nine month period ended September 30, 2006, we derived 17% and 26%, respectively, of Housekeeping and Food’s revenues from such client. This client completed its previously announced merger on March 14, 2006. Our relationship with the successor entity remains under the same terms and conditions as established prior to the merger. Although we expect to continue the relationship with this client, there can be no assurance thereof, and the loss of such client would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client changes its payment terms it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

-11-

Note 5 - Earnings Per Common Share

A reconciliation of the numerator and denominator of basic and diluted earnings per common share is as follows:

	Quarter Ended Sept 30, 2006
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	6,564,000
Basic earnings per common share	$	6,564,000		27,460,000	$	.24
Effect of dilutive securities:
Options				1,300,000		(.01	)
Diluted earnings per common share	$	6,564,000		28,760,000	$	.23

	Quarter Ended Sept 30, 2005
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	4,774,000
Basic earnings per common share	$	4,774,000		27,079,000	$	.18
Effect of dilutive securities:
Options				1,335,000		(.01	)
Diluted earnings per common share	$	4,774,000		28,414,000	$	.17

	Nine Months Ended Sept 30, 2006
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	18,557,000
Basic earnings per common share	$	18,557,000		27,399,000	$	.68
Effect of dilutive securities:
Options				1,292,000		(.03	)
Diluted earnings per common share	$	18,557,000		28,691,000	$	.65

	Nine Months Ended Sept 30, 2005
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	13,620,000
Basic earnings per common share	$	13,620,000		26,861,000	$	.51
Effect of dilutive securities:
Options				1,425,000		(.03	)
Diluted earnings per common share	$	13,620,000		28,286,000	$	.48

-12-

No outstanding options were excluded from the computation of diluted earnings per common share, for either of the three or nine month period ended September 30, 2006, as none have an exercise price in excess of the average market value of our common stock during such periods. Additionally, no outstanding options were excluded from the computation of diluted earnings per common share for either of the three or nine month periods ended September 30, 2005 as none have an exercise price in excess of the average market value of our common stock during such periods.

Dividends

We have paid regular quarterly cash dividends since the second quarter of 2003. During the nine month period ended September 30, 2006, we paid regular cash dividends totaling $9,038,000 as follows.

	1st Quarter		2nd Quarter		3rd Quarter
Cash dividend per common share	$	.10	$	.11	$	.12
Total cash dividends paid	$	2,730,000	$	3,015,000	$	3,293,000
Record date		February 3		April 28		July 28
Payment date		February 13		May 10		August 11

Additionally, on October 17, 2006, our Board of Directors declared a regular quarterly cash dividend payment of $.13 per common share to be paid on November 10, 2006 to shareholders of record as of October 27, 2006.

Note 6 - Share-Based Compensation

During the nine month period endedSeptember 30, 2006, the stock option activity under our 2002 Stock Option Plan, 1995 Incentive and Non-Qualified Stock Option Plan for key employees, and 1996 Non-Employee Director’s Stock Option Plan (collectively the “Stock Option Plans”), was as follows:

	Weighted Average Price		Number of Shares			Weighted Average Remaining Contractual Life ( In Years)		Aggregate Intrinsic Value
Outstanding, January 1, 2006	$	8.91		2,843,000
Granted		—		—
Cancelled		11.35		( 29,000	)
Exercised		9.03		( 257,000	)
Outstanding, Sept 30, 2006	$	8.87		2,557,000			5.52	$	41,660,000

The following table summarizes information about stock options outstanding at September 30, 2006.

	Options Outstanding								Options Exercisable
Exercise Price Range	Number Outstanding		Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 2.25 - 3.75		512,000		3.11	$	3.08		512,000	$	3.08
$ 4.11 - 5.62		822,000		5.45		4.67		822,000		4.67
$ 8.29 - 8.29		427,000		7.24		8.29		427,000		8.29
$13.65 - 13.65		391,000		8.24		13.65		391,000		13.65
$20.71 - 20.71		405,000		4.25		20.71		405,000		20.71
		2,557,000		5.52	$	8.87		2,557,000	$	8.87

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Other information pertaining to option activity during the nine month periods ended September 30, 2006 and September 30, 2005 was as follows:

	September 30, 2006		September 30, 2005
Weighted average grant-date fair value of stock options granted:		Not applicable		Not applicable
Total pre-tax fair value of stock options vested:		Not applicable	$	2,294,000
Total pre-tax intrinsic value of stock options exercised:	$	2,924,000	$	8,377,000

Under our Plans at September 30, 2006, in addition to the 2,557,000 issuable pursuant to outstanding option grants, an additional 1,753,000 shares of our Common Stock are available for future grants. Options outstanding and exercisable were granted at stock option prices which were not less than the fair market value of our Common Stock on the date the options were granted and no option has a term in excess of ten years. Additionally, options vested and became exercisable either on the date of grant or commencing six months from the option grant date.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment (“SFAS No. 123R” or the “Statement”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and its related implementation guidance. On January 1, 2006, we adopted the provisions of SFAS No. 123R using the modified prospective method. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as financing cash flows, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules.

Prior to the adoption of SFAS No. 123R, we followed the intrinsic value method in accordance with APB No. 25 to account for our employee stock options and share purchase rights. Accordingly, no compensation expense was recognized for share purchase rights granted in connection with the issuance of stock options under any of our Stock Option Plans, or through our 2000 Employee Stock Purchase Plan (the “ESPP”) for periods ended prior to January 1, 2006. The adoption of SFAS No. 123R primarily resulted in a change in our method of recognizing the fair value of share-based compensation. Specifically, the adoption of SFAS No. 123R has resulted in our recording compensation expense for employee stock options and ESPP rights.

The pre-tax share-based employee compensation expense recorded in the three and nine month periods ended September 30, 2006 was approximately $111,000 and $227,000, respectively. Such expense resulted solely from the estimated value to be recognized from the share-based payments of our ESPP. It is estimated, at this time, that the expense attributable to such share-based payments in the 2006 fourth quarter will approximate the average of the amounts recorded in the first three quarters of 2006. However, such future expense will be impacted by and dependent on the change in our stock price over the remaining period up to the December 31, 2006 measurement date. Additionally, we do not expect to grant any employee options and therefore recognize any share-based payments’ expense from the issuance of employee stock options in 2006 until the fourth quarter. Although such impact is expected to be material, the impact cannot be reasonably estimated because it will depend on certain factors which are not fully known at this time. The options outstanding at December 31, 2005 did not and will not impact 2006 consolidated results of operations and financial position since all option-holders were fully vested in such options at December 31, 2005.

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The fair market value of the shared-based payments of our ESPP for the three and nine month periods ended September 30, 2006 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

Risk-free interest rate	4.6	%
Expected volatility	34.5	%
Weighted average expected life (in years)	.25
Dividend yield	2.0	%

Results for the three and nine month periods ended September 30, 2005 have not been restated. Had compensation expense for employee stock options granted under our Stock Option Plans and share purchase rights under our ESPP been determined based on fair value at the grant date consistent with SFAS No. 123, our net income and earnings per share for such 2005 periods would have been the pro forma amounts indicated below:

	Quarter Ended Sept 30, 2005			Nine Months Ended Sept 30, 2005
Net Income
As reported	$	4,774,000		$	13,620,000
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects:
Stock Option Plans					(1,699,000	)
ESPP		(151,000	)(1)		(453,000	) (1)
Pro forma net income	$	4,623,000		$	11,468,000
Basic Earnings Per Common Share
As reported	$	.18		$	.51
Pro forma	$	.17		$	.43
Diluted Earnings Per Common Share
As reported	$	.17		$	.48
Pro forma	$	.16		$	.41

(1) Represents actual 2005 share-based compensation applicable to the ESPP allocated to the three and nine month periods ended September 30, 2005, respectively.

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Note 6 – Related Party Transactions

One of our directors, as well as the brother of an officer and director (collectively “Related Parties”), have separate ownership interests in several different client facilities which have entered into service agreements with us. During the nine month periods’ ended September 30,2006 and September 30, 2005, the service agreements with the client facilities in which the Related Parties have ownership interests resulted in revenues of $6,062,000 and $5,816,000, respectively. At September 30, 2006 and December 31, 2005, accounts and notes receivable from such facilities of $2,910,000 and $2,343,000, respectively, are included in the accompanying consolidated balance sheets.

Another of our directors is a member of a law firm which was retained by us. During the nine month periods’ ended September 30, 2006 and September 30, 2005, fees received from us by such firm did not exceed $75,000 in either period. Additionally, such fees did not exceed, in either period, 5% of such firm’s revenues.

Note 7 – Stockholders Equity

The Consolidated Balance Sheets for reporting period ending September 30, 2006 had 30,000,000, $.01 par value, of authorized shares of Common Stock. For the periods beginning December 31, 2003 through June 30, 2006, we inadvertently reported these authorized shares. We incorrectly reflected the effect of stock splits during the related periods, which resulted in an overstatement of authorized shares of Common Stock. The authorized shares for all effected periods are 30,000,000.

During the nine month period ended September 30, 2006, we expended $8,227,000 for the repurchase of 335,000 shares of our common stock. We remain authorized to purchase 946,000 shares pursuant to previous Board of Directors’ actions.

Note 8 – Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109”) which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the potential impact of this interpretation.

In September 2006, the Staff of the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We will adopt SAB No. 108 as of December 31, 2006. We do not expect the adoption of SAB No. 108 to have a material impact on our consolidated financial position, results of operations and cash flows.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements and Risk Factors

This report and documents incorporated by reference into this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as “believes”, “anticipates”, “plans”, “expects”, “intends”, “will”, “goal”, and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; one client accounting for approximately 19% of revenues in the nine month periodended September 30, 2006(such client completed its previously announced merger on March 14, 2006); risks associated with our acquisition of Summit Services Group, Inc., including integration risks and costs, or such business not achieving expected financial results or synergies or failure to otherwise perform as expected; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the industry, including state and local regulations pertaining to the taxability of our services; and the risk factors described in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2005 and in Part I thereof under “Government Regulation of Clients”, “Competition”, “Service Agreements/Collections” and “Risk Factors”. Many of our clients’ revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which have been and continue to be adversely affected by the change in Medicare payments under the 1997 enactment of the Medicare Prospective Payment System. That change, and the lack of substantive reimbursement funding rate reform legislation, as well as other trends in the long-term care industry have resulted in certain of our clients filing for bankruptcy protection. Others may follow. Any decisions by the government to discontinue or adversely modify legislation related to reimbursement funding rates will have a material adverse effect on our clients. These factors, in addition to delays in payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies.

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RESULTS OF OPERATIONS

The following discussion is intended to provide the reader with information that will be helpful 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 consolidated results of operations. This discussion should be read in conjunction with our financial statements as of September 30, 2006 and December 31, 2005 and the periods then ended, and the notes accompanying those financial statements.

As disclosed in Note 2 to the Notes to the Consolidated Financial Statements, the Summit acquisition was effective as of August 31, 2006. The Summit results of operations for the period September 1, 2006 to September 30, 2006, included in the results of our operations for the three month and nine month periods reported herein, were generally immaterial to our consolidated results of operations and financial information presented below (although Summit’s results were accretive in all respects). Therefore, our discussion of the primary factors effecting comparisons of period to period financial statements generally does not include the results of the Summit acquisition except where we believe the results are material to the reader’s understanding of our 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 located throughout the United States. We believe that we are the largest provider of housekeeping and laundry services to the long-term care industry in the United States, rendering such services to approximately 1,950 facilities in 47 states as of September 30, 2006. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management and hourly employees located at our clients’ facilities. We also provide services on the basis of a management-only agreement for a very limited number of clients. Our agreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days notice after the initial 90-day period.

We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and food services (“Food”).

The services provided by Housekeeping consist primarily of the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.

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Food, which began operations in 1997, consists of providing for the development of a menu that meets the patient’s dietary needs, and the purchasing and preparing of the food for delivery to the patients.

In addition to Summit, we operate two other wholly-owned subsidiaries, HCSG Supply, Inc. (“Supply”) and Huntingdon Holdings, Inc. (“Huntingdon”). Supply purchases, warehouses and distributes the supplies and equipment used in providing our Housekeeping segment services. Huntingdon invests our cash and cash equivalents.

Consolidated Operations

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

	Relation to Consolidated Revenues
	For the Quarter Ended Sept 30,						For the Nine Months Ended Sept 30,
	2006			2005			2006			2005
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating costs and expenses:
Costs of services provided		86.3			87.4			86.1			87.3
Selling, general and
administration		6.7			6.8			6.9			7.0
Investment and interest income		1.0			.8			.9			.6
Income before income taxes		8.0			6.6			7.9			6.3
Income taxes		3.0			2.5			2.9			2.4
Net income		5.0	%		4.1	%		5.0	%		3.9	%

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report, we anticipate our financial performance for the remainder of 2006 to be comparable to the nine month period ended September 30, 2006percentages presented in the above table as they relate to consolidated revenues.

Housekeeping is our largest and core reportable segment, representing approximately 80% of consolidated revenues for both the quarter and nine month period ended September 30, 2006. Food revenues represented approximately 20% of consolidated revenues for such periods.

Although there can be no assurance thereof, we believe that for the remainder of 2006 each of Housekeeping’s and Food’s revenues, as a percentage of consolidated revenues, will remain approximately the same as their respective percentages noted above. Furthermore, we expect the sources of growth for the remainder of 2006 for the respective operating segments will be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Food is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.

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2006 Third Quarter Compared with 2005 Third Quarter

The following table sets forth 2006 third quarter income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to 2005 third quarter amounts.

									Reportable Segments
									Housekeeping					Food
	Consolidated		Percent increase			Corporate and eliminations			Amount		%incr			Amount		%incr
Revenues	$	130,083,000		10.5	%	$	(1,373,000	)	$	105,053,000		10.4	%	$	26,403,000		11.1	%
Cost of services provided		112,195,000		9.0			9,184,000			95,771,000		9.6			25,608,000		9.9
Selling, general and administrative expense		8,767,000		9.3			(8,767,000	)		—							—
Investment and interest Income		1,298,000		40.6			1,298,000			—							—
Income before income taxes	$	10,419,000		35.3	%	$	342,000		$	9,282,000		20.0	%	$	795,000		66.5	%

Revenues

Consolidated

Consolidated revenues increased 10.5%, of which 3.5% is related to the Summit acquisition, to $130,083,000 in the 2006 third quarter compared to $117,684,000 in the 2005 third quarter as a result of the factors discussed below under Reportable Segments.

Our Major Client accounted for 19% of consolidated revenues in each of the three month periods ended September 30, 2006 and September 30, 2005. This client completed its previously announced merger on March 14, 2006. Our relationship with the successor entity remains under the same terms and conditions as established prior to the merger. Although we expect to continue the relationship with this client’s successor, there can be no assurance thereof, and the loss of such client would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client’s successor changes its payment terms it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Reportable Segments

Housekeeping’s 10.4% net growth in reportable segment revenues resulted primarily from an increase of 6.4% attributable to service agreements entered into with new clients and a 4.0% increase in revenues related to the Summit acquisition.

Food’s 11.1% net growth in reportable segment revenues is primarily a result of providing this service to existing Housekeeping clients. The Summit acquisition accounted for 1.3% of the increase.

We derived 17% and 26%, respectively, of Housekeeping and Food’s 2006 third quarter revenues from the Major Client.

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Costs of services provided

Consolidated

Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the 2006 third quarter decreased to 86.3 % from 87.4 % in the corresponding 2005 quarter. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance

Cost of Services Provided-Key Indicators	2006 %		2005 %		(Decr) %
Bad debt provision		.1		.2		(.1	)
Workers’ compensation and general liability insurance		3.4		3.6		(.2	)

The decrease in the bad debt provision is a result of improved collection experience. The decrease in workers’ compensation and general liability insurance is primarily a result of reduced payments to claimants due to improved claims’ experience.

Reportable Segments

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the 2006 third quarter decreased to 91.2% from 91.9% in the corresponding 2005 quarter. Cost of services provided for Food, as a percentage of Food revenues, for the 2006 third quarter decreased to 97.0% from 98.0% in the corresponding 2005 quarter.

The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segment’s revenues, that we manage on a reportable segment basis in evaluating our financial performance:

Cost of Services Provided-Key Indicators	2006 %		2005 %		(Decr) %
Housekeeping labor and other labor costs		81.6		82.9		(1.3	)
Housekeeping supplies		5.6		5.7		(.1	)
Food labor and other labor costs		54.7		55.7		(1.0	)
Food supplies		37.4		37.5		(.1	)

The decrease in Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, resulted primarily from efficiencies achieved. The decrease in Housekeeping supplies resulted primarily from price decreases in the cost of supplies for our laundry services.

The decrease in Food labor and other labor costs, as percentage of Food revenues, resulted primarily from efficiencies achieved. The decrease in Food supplies, as a percentage of Food revenues, is a result of price decreases in vendor purchasing agreements.

Consolidated Selling, General and Administrative Expense

Consistent with our 10.5% growth in consolidated revenues, selling, general and administrative expenses increased by 9.3% or $743,000 of which approximately 3.1% or $245,000 is related to the Summit acquisition. As a percentage of total consolidated revenues, these expenses remained essentially unchanged at 6.7% in the 2006 third quarter as compared to 6.8% in the 2005 third quarter.

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Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the 2006 third quarter increased to 8.0 %, as a percentage of consolidated revenues, compared to 6.6% in the 2005 third quarter.

Reportable Segments

Housekeeping’s 20.0% increase in income before income taxes is primarily attributable to the improvement in the gross profit earned at the client facility level and the gross profit earned on the 6.4% increase in organic reportable segment revenues. Of the 20% increase in income before income taxes, approximately 5% is related to Summit’s results.

Food’s income before income taxes increased 66.5% on a reportable segment basis, of which approximately 7.5% is related to Summit’s results. Such increase is primarily attributable to an improvement in the gross profit earned at the client facility level and the gross profit earned on the 9.7% increase in organic reportable segment revenues.

Consolidated Investment and Interest Income

Investment and interest income, as a percentage of consolidated revenues, was 1.0% in the 2006 third quarter compared to .8% in the 2005 third quarter. The slight net increase is attributable to improved rates of return on the higher cash and cash equivalents’ average balances, which was offset by less appreciation in the market value of the investments held in our Deferred Compensation Fund.

Consolidated Income Taxes

Our effective tax rate for the quarter ended September 30, 2006 was 37% compared to our September 30, 2005 effective tax rate of 38%. The decrease in the effective tax rate is primarily a result of a reduction in the state and local effective tax rate. Absent any significant change in federal, or state and local tax laws, we expect our effective tax rate for the remainder of 2006 to be approximately the same as realized in the 2006 third quarter. Our 37% effective tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income for the 2006 third quarter increased to 5.0%, as a percentage of consolidated revenues, compared to 4.1% in the 2005 third quarter.

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2006 Nine Month Period Compared with 2005 Nine Month Period

The following table sets forth, for the nine month period ended September 30, 2006 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to the nine month period ended September 30, 2005 amounts.

									Reportable Segments
									Housekeeping					Food
	Consolidated		Percent increase			Corporate and eliminations			Amount		%incr			Amount		%incr
Revenues	$	371,841,000		6.7	%	$	(477,000	)	$	298,203,000		6.7	%	$	74,115,000		6.9	%
Cost of services provided		320,220,000		5.3			21,554,000			270,070,000		5.8			71,704,000		6.4
Selling, general and administrative expense		25,781,000		5.0			( 25,781,000	)		—					—
Investment and interest Income		3,617,000		68.9			3,617,000			—					—
Income before income taxes	$	29,457,000		34.1	%	$	(1,087,000	)	$	28,133,000		16.4	%	$	2,411,000		26.5	%

Revenues

Consolidated

Consolidated revenues increased 6.7%, of which approximately 1.2% is related to the Summit acquisition, to $371,841,000 in the nine month period ended September 30, 2006 compared to $348,426,000 in the same 2005 period as a result of the factors discussed below under Reportable Segments.

Our Major Client accounted for 19% of consolidated revenues in each of the nine month periods ended September 30, 2006 and September 30, 2005.

Reportable Segments

Housekeeping’s 6.7% net growth in reportable segment revenues is primarily a result of an increase in service agreements entered into with new clients. Summit contributed approximately 1.4% to Housekeeping’s reportable segment revenues.

Food’s 6.9% net growth in reportable segment revenues was essentially a result of providing this service to existing Housekeeping clients.

We derived 17% and 26%, respectively, of Housekeeping and Food’s 2006 nine month period’s revenues from the Major Client.

Costs of services provided

Consolidated

Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the nine month period ended September 30, 2006 decreased to 86.1% from 87.3% in the corresponding 2005 period. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance

Cost of Services Provided-Key Indicators	2006 %		2005 %		(Decr) %
Bad debt provision		.2		.3		(.1	)
Workers’ compensation and general
liability insurance		3.7		4.1		(.4	)

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The decrease in the bad debt provision is a result of improved collections’ experience. The decrease in the workers’ compensation and general liability insurance is primarily a result of reduced payments to claimants due to improved claims’ experience.

Reportable Segments

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the nine month period ended September 30, 2006 decreased to 90.6% from 91.4% in the corresponding 2005 period. Cost of services provided for Food, as a percentage of Food revenues, for the 2006 nine month period decreased to 96.7% from 97.2% in the corresponding 2005 nine month period.

The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segment’s revenues, that we manage on a reportable segment basis in evaluating our financial performance:

Cost of Services Provided-Key Indicators	2006 %		2005 %		Incr (Decr) %
Housekeeping labor and other labor costs		81.4		82.3		( .9	)
Housekeeping supplies		5.5		5.3		.2
Food labor and other labor costs		54.5		55.0		( .5	)
Food supplies		37.4		38.9		(1.5	)

The decrease in Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, resulted primarily from efficiencies achieved. The increase in Housekeeping supplies resulted primarily from vendor price increases.

The decrease in Food labor and other labor costs as a percentage of Food segment revenues resulted primarily from efficiencies achieved. The decrease in Food segment supplies, as a percentage of Food segment revenues, is a result of price decreases in vendor purchasing agreements.

Consolidated Selling, General and Administrative Expense

Consistent with our 6.7% growth in consolidated revenues, selling, general and administrative expenses increased by 5.0% or $1,219,000 in comparing the nine month periods ended September 30, 2006 and September 30, 2005. However, as a percentage of total consolidated revenues, these expenses decreased by .1% to 6.9% in the 2006 period as compared to 7.0% in the 2005 period. The decrease is primarily attributable to our ability to control these expenses and comparing them to a greater revenue base in the current nine month period.

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Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the nine month period ended September 30, 2006 increased to 7.9 %, as a percentage of consolidated revenues, compared to 6.3% in the same 2005 period.

Reportable Segments

Housekeeping’s 16.4% increase in income before income taxes is attributable to the improvement in the gross profit earned at the client facility level and the gross profit earned on the 5.3% increase in organic reportable segment revenues. Of the 16.4% increase in income before income taxes, approximately 1.7% is attributable to Summit’s results.

Food’s income before income taxes increased 26.5% on a reportable segment basis which is primarily attributable to an improvement in the gross profit earned at the client facility level and the gross profit earned on the 6.9% increase in reportable segment revenues.

Consolidated Investment and Interest Income

Investment and interest income, as a percentage of consolidated revenues, was 0.9% in the nine month period ended September 30, 2006 compared to .6% in the same 2005 period. The net increase is attributable to improved rates of return on the higher cash and cash equivalents’ average balances, as well as greater appreciation in the market value of the investments held in our Deferred Compensation Fund.

Consolidated Income Taxes

Our effective tax rate for the nine month period ended September 30, 2006 was 37% compared to our September 30, 2005 effective tax rate of 38%. The decrease in the effective tax rate is primarily a result of a reduction in the state and local effective tax rate. Absent any significant change in federal, or state and local tax laws, we expect our effective tax rate for the remainder of 2006 to be approximately the same as realized in the 2006 nine month period. Our 37% effective tax rate differs from the federal income tax statutory rate principally because of the effect of state and local income taxes.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income for the nine months ended September 30, 2006 increased to 5.0%, as a percentage of consolidated revenues, compared to 3.9% in nine month period ended September 30, 2005.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In regards to our Summit acquisition (discussed in Note 2), we have preliminarily estimated the related Goodwill and Other Intangible Assets to be $17,728,000. This allocation is subject to revision pending a valuation to be performed by an independent third party engaged by the Company. Our current allocation of the purchase price to assets acquired and liabilities assumed is based on preliminary estimates and certain assumptions that we believe are reasonable under the circumstances. The Goodwill and Other Intangible Assets are currently deemed to have an indefinite life, and accordingly, are not being amortized at this time. Although pursuant to the completion of the valuation, we will reclassify some assets from Goodwill and Other Intangible Assets to specifically identified intangible assets which will have a definite life and be subject to amortization over such life. We do not believe that any amortization, resulting from a reclassification in the 2006 fourth quarter of such intangible assets, applicable to the 2006 third quarter would be material to the 2006 third quarter results of operations.

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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 management’s 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 and estimates are described in the following paragraphs. For these estimates, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.

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 accounting standards generally accepted in the United States, 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, 2005, which contain critical accounting policies and estimates and other disclosures required by accounting principles generally accepted in the United States.

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, wegenerally 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 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.

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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 due from clients in bankruptcy, clients with which we are in litigation for collection and other 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 to be less than the recorded amount on our balance sheet, we will charge-off the applicable amount to the Allowance for Doubtful Accounts.

At September 30, 2006, we identified accounts totaling $4,016,000 that require an Allowance for Doubtful Accounts based on potential impairment or loss of value. An Allowance for Doubtful Accounts totaling $3,403,000 was provided for these accounts at such date. Actual collections of these accounts could differ from that which we currently estimate. If our actual collection experience is 5% less than our estimate, the related increase to our Allowance for Doubtful Accounts would decrease net income by $19,000.

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 Securities and Exchange Commission for the year ended December 31, 2005 in Part I thereof under “Government Regulation of Clients”, “Service Agreements/Collections” and “Risk Factors”, 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 effect on our results of operations and financial condition.

Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 29% of our liabilities at September 30, 2006. Our accounting for this plan is affected by various uncertainties because we must make assumptions and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. We address these uncertainties by regularly evaluating 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 a material adverse effect on our consolidated results of operations and financial condition. 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.

-27-

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 and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce net income by approximately $34,000. Additionally, reducing the estimated payout period by six months would result in an approximate $96,000 reduction in net income.

For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.

Liquidity and Capital Resources

At September 30, 2006, we had cash and cash equivalents of $76,399,000 and working capital of $138,468,000 compared to December 31, 2005 cash and cash equivalents of $91,005,000 and working capital of $142,535,000. We view our cash and cash equivalents as our principal measure of liquidity. Our current ratio at September 30, 2006 decreased to 5.3 to 1 compared to 7.2 to 1 at December 31, 2005. This decrease resulted primarily from lower cash balances due to disbursements related to the Summit acquisition and the timing of payments for accrued payroll, accrued and withheld payroll taxes. On an historical basis, our operations have generally produced consistent cash flow and have required limited capital resources. We believe our current and near term cash flow positions will enable us to fund our continued anticipated growth.

Operating Activities

The net cash provided by our operating activities was $16,666,000 for the nine month period ended September 30, 2006. The principal sources of net cash flows from operating activities for the nine month period ended September 30, 2006 were net income, including non-cash charges to operations for bad debt provisions and depreciation. Additionally, operating activities’ cash flows increased by $7,048,000 as a result of the timing of payments for accrued payroll, accrued and withheld payroll taxes. The operating activity that used the largest amount of cash during the nine month period ended September 30, 2006 was a net increase of $9,015,000 in accounts and notes receivable and long-term notes receivable resulting primarily from the 6.7% growth in the Company’s 2006 nine month period revenues.

Investing Activities

Our principal use of cash in investing activities for the nine month period ended September 30, 2006 was $9,678,000 for the purchase of Summit Services Group, Inc. Additionally, we purchased $1,458,000 of housekeeping equipment, computer software and equipment, and laundry equipment installations. Under our current plans, which are subject to revision upon further review, it is our intention to spend an aggregate of $500,000 to $1,000,000 during the remainder of 2006 for such capital expenditures.

-28-

Financing Activities

In connection with the Summit acquisition, we made cash payments of $6,163,000 to payoff certain indebtness of Summit. We have paid regular quarterly cash dividends since the second quarter of 2003. During the nine month period ended September 30, 2006, we paid regular cash dividends totaling $9,038,000 as follows.

	1st Quarter		2nd Quarter		3rd Quarter
Cash dividend per common share	$	.10	$	.11	$	.12
Total cash dividends paid	$	2,730,000	$	3,015,000	$	3,293,000
Record date		February 3		April 28		July 28
Payment date		February 13		May 10		August 11

Additionally, on October 17, 2006, our Board of Directors declared a regular quarterly cash dividend payment of $.13 per common share to be paid on November 10, 2006 to shareholders of record as of October 27, 2006.

Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.

During the nine month period ended September 30, 2006, we expended $8,227,000 for the repurchase of 335,000 shares of our common stock. We remain authorized to purchase 946,000 shares pursuant to previous Board of Directors’ actions.

During the nine month period ended September 30, 2006, we received proceeds of $2,296,000 from the exercise of stock options by employees and directors, as well as recognizing an income tax benefit of $1,007,000 from such stock option transactions.

Line of Credit

We have a $25,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At September 30, 2006 and December 31, 2005, there were no borrowings under the line. However, at such dates, we had outstanding $24,725,000 and $17,925,000, respectively, of irrevocable standby letters of credit which relate to payment obligations under our insurance programs. As a result of the letters of credit issued, the amount available under the line of credit was reduced by $24,725,000 and $17,925,000 at September 30, 2006 and December 31, 2005, respectively.

The line of credit requires us to satisfy two financial covenants. Such covenants, and their respective status at September 30, 2006, were as follows:

Covenant Description and Requirement	Status at September 30, 2006
Commitment coverage ratio: cash and cash equivalents must equal or exceed outstanding obligations under the line by a multiple of 2.	Commitment coverage is 3.1
Tangible net worth: must exceed $122,000,000.	Tangible net worth is $142,106,000

As noted above, we complied with the financial covenants at September 30, 2006 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2007. We believe the line of credit will be renewed at that time.

-29-

Accounts and Notes Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. The Balance Budget Act of 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998, of a Medicare Prospective Payment System for skilled nursing facilities which significantly changed the reimbursement procedures and the amounts of reimbursement our clients receive. Many of our clients’ revenues are highly contingent on Medicare and Medicaid reimbursement funding rates. Therefore, they have been and continue to be adversely affected by changes in applicable laws and regulations, as well as other trends in the long-term care industry. This has resulted in certain of our clients filing for bankruptcy protection. Others may follow. These factors, in addition to delays in payments from clients have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance our ability to collect the amounts due. At September 30, 2006 and December 31, 2005, we had $8,894,000 and $8,514,000, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.

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 who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $725,000 and $875,000, respectively in the nine month periods ended September 30, 2006 and September 30, 2005. These provisions represent approximately .2% and .3%, as a percentage of total revenues for each respective period. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk 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. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.

At September 30, 2006, amounts due from our Major Client represented less than 1% of our accounts receivable balance.

-30-

Insurance Programs

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 and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period.

For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.

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 evaluation is 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 effect on our results of operations and financial condition.

Capital Expenditures

The level of capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment purchases, laundry and linen equipment installations, and computer hardware and software. Although we have no specific material commitments for capital expenditures through the end of calendar year 2006, we estimate that for the remainder of 2006 we will have capital expenditures of approximately $500,000 to $1,000,000 in connection with housekeeping equipment purchases and laundry and linen equipment installations in our clients’ facilities, as well as expenditures relating to internal data processing hardware and software requirements. We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would, if necessary, seek to obtain necessary working capital from such sources as long-term debt or equity financing.

Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit previously discussed.

Effects of Inflation

Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing such cost increases through to our clients.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to market risk is not significant.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission (“SEC”) rules. Disclosure controls are also designed with the objective of ensuring 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.

As of September 30, 2006 (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon our evaluation, at the Evaluation Date, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to insure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and regulations.

Changes in Internal Controls

There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

Certifications

Certifications of the Principal Executive Officer and Principal Financial Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings. Not Applicable

ITEM 1A. Risk Factors

The materialization of any risks and uncertainties identified in our Cautionary Statement Regarding Forward Looking Statements contained herein together with those risks previously disclosed in our Form 10-K (referred to elsewhere herein) filed with the Securities and Exchange Commission for the year ended December 31, 2005 or those that are presently unforeseen, could result in significant adverse effects on our financial position, results of operations and cash flows.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Repurchases

2006 Period	(a)  Total number of Shares purchased		(b) Average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Maximum number of shares that may yet be purchased under the plans or programs
July 1 to July 31		none
Aug 1 to Aug 31		none
Sept 1 to Sept 30		301,218	$	25.28		301,218		946,456

ITEM 3. Defaults under Senior Securities. Not Applicable

ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable

ITEM 5. Other Information.

a) None

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ITEM 6. Exhibits

a)Exhibits -

2.1 Agreement and Plan of Merger By and Among Healthcare Services Group, Inc., Summit Services Group, Inc., Joseph S. Cuzzupoli, John Bullock, Lawrence G. Freni, Wellfleet Capital Partners, Inc., and Navone Investments, LLC and Thomas G. Hixon, S. Keith Pritchard and P.H. Benjamin Chang.

31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

-34-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HEALTHCARE SERVICES GROUP, INC.
October 25, 2006	/s/ Daniel P. McCartney
Date	DANIEL P. McCARTNEY, Chief Executive Officer

October 25, 2006	/s/ Thomas A. Cook
Date	THOMAS A. COOK, President and Chief Operating Officer

October 25, 2006	/s/ James L. DiStefano
Date	JAMES L. DiSTEFANO, Chief Financial Officer and Treasurer

October 25, 2006	/s/ Richard W. Hudson
Date	RICHARD W. HUDSON, Vice President-Finance, Secretary and Chief Accounting Officer

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EX-2.1

EXECUTION VERSION

FINAL

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

HEALTHCARE SERVICES GROUP, INC., HCSG, INC., HCSG MERGER, LLC,

SUMMIT SERVICES GROUP, INC., JOSEPH S. CUZZUPOLI, JOHN A. BULLOCK,

LAWRENCE G. FRENI, WELLFLEET CAPITAL PARTNERS, INC., AND NAVONE

INVESTMENTS, LLC

AND

THOMAS G. HIXON, S. KEITH PRITCHARD, AND P.H. BENJAMIN CHANG FOR

THE LIMITED PURPOSES SET FORTH HEREIN

DATED: SEPTEMBER 18, 2006

TABLE OF CONTENTS

			Page
BACKGROUND			1
AGREEMENT			4
1.	INCORPORATION OF BACKGROUND		4
2.	MERGER		4
	2.1.	The Merger	4
	2.2.	Effective Time	4
	2.3.	Effect of the Merger	4
	2.4.	Articles of Incorporation; Bylaws	5
	2.5.	Directors and Officers	5
3.	CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES		6
	3.1.	Conversion of Securities	6
	3.2.	Exchange of Certificates	7
	3.3.	Share Transfer Books	8
4.	REPRESENTATIONS AND WARRANTIES OF INSIDER SHAREHOLDERS WITH RESPECT TO SUMMIT		9
	4.1.	Corporate Status, Outstanding Stock	9
	4.2.	Due Authorization and Validity of Agreement	10
	4.3.	Officers, Directors, Bank Accounts, etc	10
	4.4.	Subsidiaries and Joint Ventures	10
	4.5.	Financial Statements	10
	4.6.	Summit Loans	11
	4.7.	Leases	11
	4.8.	Personal Property	12
	4.9.	Service Agreements	13
	4.10.	Accounts Receivable	13
	4.11.	Insurance	13
	4.12.	No Unrecorded Liabilities	13
	4.13.	Service Agreements, Leases, and Other Commitments	14
	4.14.	Collective Bargaining Agreements and Other Employee Matters	15
	4.15.	Litigation	16
	4.16.	Conflicting Interests	16
	4.17.	Compliance with Law and Regulations	17

i

TABLE OF CONTENTS

(continued)

			Page
	4.18.	Agreement Not in Breach of Other Instruments Affecting Summit; Governmental Consents	17
	4.19.	Tax Matters	19
	4.20.	Absence of Certain Actions	20
	4.21.	No Material Adverse Change	21
	4.22.	Environmental Matters	21
	4.23.	No Broker or Finder	22
	4.24.	Statements and Other Documents Not Misleading	22
	4.25.	Loans to Officers, Directors, and Shareholders	22
	4.26.	Unpaid State Sales Taxes and Waltham Lease	23
5.	FURTHER REPRESENTATIONS AND WARRANTIES OF THE SUMMIT SHAREHOLDERS		23
	5.1.	Ownership of Capital Stock of Summit	23
	5.2.	Authorization; Valid and Binding Agreement	23
	5.3.	Agreement Not in Breach of Other Instruments Affecting the Summit Shareholders	24
	5.4.	Shareholders’ Vote	24
6.	REPRESENTATIONS AND WARRANTIES OF HIXON, PRITCHARD, AND CHANG		25
	6.1.	Valid and Binding Agreement	25
7.	REPRESENTATIONS AND WARRANTIES OF HEALTHCARE		25
	7.1.	Corporate Status and Authority; Outstanding Stock	25
	7.2.	Status of Healthcare Stock	26
	7.3.	Agreement Not in Breach of Other Instruments Affecting Healthcare	26
	7.4.	Financial Statements	26
	7.5.	Healthcare’s SEC Filings	26
	7.6.	No Broker or Finder; Purchase for Investment	27
	7.7.	Statements and Other Documents Not Misleading	27
8.	CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES		27
9.	CLOSING		28
	9.1.	Closing Date	28

ii

TABLE OF CONTENTS

(continued)

			Page
	9.2.	Deliveries by the Summit Shareholders at Closing	27
	9.3.	Deliveries by Healthcare at Closing	28
10.	ADDITIONAL TAX MATTERS		29
	10.1.	Filing of Tax Returns; Payment of Taxes	29
	10.2.	Tax Audits	30
	10.3.	General Cooperation on Tax Matters	30
	10.4.	Disputes	31
	10.5.	Unpaid State Sales Taxes	31
	10.6.	Tax Treatment of Merger	32
11.	INDEMNIFICATION		32
	11.1.	By the Insider Shareholders	32
	11.2.	By the Summit Shareholders	33
	11.3.	By Hixon, Pritchard and Chang	33
	11.4.	By Healthcare	33
	11.5.	Limitations on Indemnification	34
	11.6.	Procedures for Indemnification Claims	37
	11.7.	Payment of Losses	38
	11.8.	Remedy Exclusive	38
	11.9.	Unpaid State Sales Taxes and Waltham Lease	38
12.	CONFIDENTIALITY; PUBLICITY		38
13.	SECURITIES LAWS COMPLIANCE PROCEDURES		39
	13.1.	Knowledge Respecting Healthcare	39
	13.2.	Status of Shares to be Issued	40
14.	REGISTRATION OF HEALTHCARE SHARES		42
15.	FURTHER ASSURANCES		45
16.	RESTRICTIVE COVENANTS		45
	16.1.	Covenant Not To Compete	45
	16.2.	Covenant Not To Solicit Clients Or Accounts	46
	16.3.	Covenant Not To Solicit Or Hire Employees	47
	16.4.	Covenant Not To Use Or Disclose Confidential Information	48

iii

TABLE OF CONTENTS

(continued)

			Page
	16.5.	Remedies for Breach	49
	16.6.	Extension of Restriction	49
17.	MISCELLANEOUS		50
	17.1	Resolution of Disputes	50
	17.2.	Notices	51
	17.3.	Applicable Law	52
	17.4.	Binding Agreement	52
	17.5.	Expenses	52
	17.6.	Entire Agreement	52
	17.7.	Amendments and Waivers	52
	17.8.	Severability	53
	17.9	Use of Defined Terms	53
	17.10	Counterparts and Facsimiles	53

iv

EXHIBITS

EXHIBIT “A-1”	–	Escrow Agreement
EXHIBIT “A-2”	–	Waltham Lease Indemnification Agreement
EXHIBIT “B”	–	Allocation of Merger Consideration
EXHIBIT “D”	–	Form of HCSG Operating Agreement
EXHIBIT “E”	–	Form of Service Agreements
EXHIBIT “F”	–	Opinion of Bingham McCutchen LLP
EXHIBIT “G”		General Releases in Favor of Summit
EXHIBIT “H”	–	Certification by each Summit Shareholder Pursuant to the Foreign Investment Real Property Tax Act
EXHIBIT “I-1”	–	Employment Agreement of Joseph S. Cuzzupoli
EXHIBIT “I-2”	–	Employment Agreement of John A. Bullock
EXHIBIT “I-3”	–	Employment Agreement of Lawrence G. Freni

v

SCHEDULES

SCHEDULE 4.1.1(a)	–	States in which Summit is Qualified
SCHEDULE 4.1.1(b)	–	Summit’s Capital Stock
SCHEDULE 4.1.1(c)	–	Summit’s Options, Warrants, Rights, Shareholder Agreements Or Other Investments
SCHEDULE 4.1.1(d)	–	Defaults or Violations of Articles of Organization or Bylaws
SCHEDULE 4.3	–	Officers, Directors, Bank Accounts, Safe Deposit Boxes, Authorized Personnel
SCHEDULE 4.5	–	Financial Statements
SCHEDULE 4.6	–	Summit Loan Obligations as of Closing Date
SCHEDULE 4.7.1	–	Leases
SCHEDULE 4.7.4	–	Assignment or Sublet of Lease Interests
SCHEDULE 4.8	–	Personal Property Exceptions
SCHEDULE 4.9	–	Service Agreements
SCHEDULE 4.10	–	Accounts Receivables, Set-Offs, Deductions or Defenses
SCHEDULE 4.11	–	Insurance
SCHEDULE 4.12	–	Unrecorded Liabilities
SCHEDULE 4.13.1(c)	–	Summit Loan Obligation Documentation
SCHEDULE 4.13.1(d)	–	Other Commitments
SCHEDULE 4.13.2	–	Defaults under Summit Agreements, List of Summit’s Agreements Which may be Terminated or not Renewed
SCHEDULE 4.14	–	Collective Bargaining Agreements and Other Employee Matters
SCHEDULE 4.15	–	Litigation
SCHEDULE 4.16	–	Conflicting Interests

vi

SCHEDULE 4.18	–	Agreement Not in Breach of Other Instruments Affecting Summit; Governmental Consent
SCHEDULE 4.19.3	–	Tax Liabilities
SCHEDULE 4.19.5	–	Tax Returns of Summit for Taxable Years Ended December 27, 2003, December 25, 2004 and December 30, 2005
SCHEDULE 4.20	–	Absence of Certain Actions
SCHEDULE 4.25	–	Loans to Officers, Directors and Shareholders
SCHEDULE 5.1	–	Restrictions on Transfer
SCHEDULE 9.3.2	–	Summit Bonus Employees
SCHEDULE 11.5.2(a)	–	Allocation of Insider Shareholder Indemnification Limits
SCHEDULE 11.5.2(c)	–	Allocation of Hixon, Pritchard and Chang Indemnification Limits

vii

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made this 18th day of September 2006, by and among HEALTHCARE SERVICES GROUP, INC., a Pennsylvania corporation (“Healthcare”); HCSG, INC., a Massachusetts corporation (“Merger Sub”); HCSG MERGER, LLC, a Massachusetts limited liability company (“HCSG”); SUMMIT SERVICES GROUP, INC., a Massachusetts corporation (“Summit”); JOSEPH S. CUZZUPOLI (“Cuzzupoli”), a resident of Massachusetts; JOHN A. BULLOCK (“Bullock”), a resident of Massachusetts; LAWRENCE G. FRENI (“Freni”), a resident of Massachusetts; WELLFLEET CAPITAL PARTNERS, INC., a Massachusetts corporation (“Wellfleet”); NAVONE INVESTMENTS, LLC, a Delaware limited liability company (“Navone”); THOMAS G. HIXON (“Hixon”), a resident of Mississippi; S. KEITH PRITCHARD (“Pritchard”), a resident of Colorado; and P. H. BENJAMIN CHANG (“Chang”), a resident of Massachusetts. Cuzzupoli, Bullock, and Freni are sometimes referred to in this Agreement individually as an “Insider Shareholder” and collectively as the “Insider Shareholders.” Cuzzupoli, Bullock, Freni, Wellfleet, and Navone are sometimes referred to in this Agreement individually as a “Summit Shareholder” and collectively as the “Summit Shareholders.”

BACKGROUND

A.Healthcare and Summit are each in the business of providing housekeeping, laundry, and food services to long-term healthcare facilities.

B.Merger Sub and HCSG are newly-formed, wholly-owned subsidiaries of Healthcare.

C.All of the issued and outstanding shares of capital stock of Summit (collectively, the “Summit Shares”) are held of record and beneficially as follows:

		Number and Kind of Shares
(i)	Cuzzupoli	115,552 – Common Stock
(ii)	Bullock	94,543 – Common Stock
(iii)	Freni	11,905 – Common Stock
(iv)	Wellfleet	8,000 – Common Stock
(v)	Navone	138,500 – Series A Convertible Preferred Stock

D.Wellfleet and Navone are investors in Summit and are not actively involved in its management.

E.Hixon and Pritchard are the controlling parties of Navone and Chang is the controlling party of Wellfleet, and, as such, each is executing this Agreement. Hixon, Pritchard, and Chang shall be bound only by the provisions of Sections 1, 6, 8, 9, 11, 12, 15, 16 and 17 of this Agreement.

F.Healthcare desires to acquire Summit by (a) a merger (the “First Merger”) of Merger Sub with and into Summit, with Summit being the surviving entity, and (b) immediately after the consummation and effectiveness of the First Merger, a merger (the “Second Merger”) of Summit with and into HCSG, with HCSG being the surviving entity (the First Merger and the Second Merger are sometimes hereinafter collectively referred to as the “Merger”). The transaction is intended to qualify as a “single integrated transaction” qualifying as a reorganization under Internal Revenue Service Code Section 368(a)(1)(A) in accordance with Rev. Rul. 2001-46, 2001-42 IRB 421.

G.Healthcare and Summit entered into a Confidentiality Agreement made as of June 28, 2006.

H.The consideration to be paid by Healthcare to the Summit Shareholders in the Merger (the “Merger Consideration”) shall be Seventeen Million Two Hundred Thousand Dollars ($17,200,000) of which (i) Nine Million Four Hundred Fifty Nine Thousand Nine Hundred Eighty-Eight Dollars ($9,459,988) shall be payable in cash (the “Cash Merger Consideration”), and (ii) Seven Million Seven Hundred Forty Thousand and Twelve Dollars ($7,740,012) shall be payable by the issuance of shares (the “Stock Merger Consideration”) of Healthcare common stock, $.01 par value per share (the “Healthcare Common Stock”), valued at Twenty-One Dollars ($21.00) per share, subject to the provisions of Section 14.

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I.Immediately following the consummation of the Merger, Healthcare shall lend to Summit up to an aggregate amount of Three Hundred Thousand Dollars ($300,000) (the “Bonus Employees Loan”) which will be used to provide cash bonuses (collectively, the “Summit Bonuses”) to a limited number of key employees of Summit who are not shareholders of Summit and who will be selected by Mr. Cuzzupoli, the President of Summit and are listed on Schedule 9.3.2 (such key employees, the “Summit Bonus Employees”).
 

J.An issue exists regarding whether Summit is liable for certain unpaid sales, use and/or gross receipts taxes owing to certain states (all of such unpaid sales taxes, together with all interest and penalties in connection therewith, the “Unpaid State Sales Taxes”). In order to ensure payment of all or a portion of the Unpaid State Sales Taxes, the Summit Shareholders have agreed that the sum of One Million Seven Hundred Sixty-Four Thousand Seventy-Seven Dollars ($1,764,077) shall be set aside and deducted from the Cash Merger Consideration (in the aggregate, the “Escrowed Cash Merger Consideration”) and held in escrow in accordance with the terms of the Settlement and Escrow Agreement attached hereto as Exhibit “A-1” (the “Escrow Agreement”).
 

K.Summit is a party to a certain lease with 265 Winter Street LLC for office space located at 265 Winter Street, Waltham Massachusetts (the “Waltham Lease”). In connection therewith, Cuzzupoli has agreed to indemnify Healthcare and Summit for all liabilities arising under the Waltham Lease pursuant to the terms of the Waltham Lease Indemnification Agreement attached hereto as Exhibit “A-2” (the “Waltham Lease Indemnification Agreement”).
 

L.The Merger Consideration shall be distributed to the Summit Shareholders in accordance with the schedule set forth on Exhibit “B” attached hereto.

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AGREEMENT

NOW, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

1.Incorporation of Background. The Background to this Agreement is incorporated into and made part of this Agreement.
 

2.Merger.
 

2.1The Merger. On the Closing Date (as defined in Section 9), Merger Sub shall be merged with and into Summit, and immediately thereafter, Summit shall be merged with and into HCSG. As a result of the First Merger, the separate corporate existence of Merger Sub shall cease and Summit shall continue as the surviving corporation of the First Merger (“First Survivor”), and as a result of the Second Merger, the separate corporate existence of Summit shall cease and HCSG shall continue as the surviving entity (“Second Survivor”).

2.2  Effective Time. Articles of Merger (the “Articles of Merger”) shall be duly executed by Merger Sub and Summit, and Articles of Merger and a Certificate of Merger (collectively, the “Second Merger Certificates”) shall be duly executed by Summit and HCSG, and on the Closing Date (as defined in Section 9.1), the Articles of Merger and the Second Merger Certificates (in that order) shall be respectively filed with the Secretary of State of the Commonwealth of Massachusetts. The date and time the Merger becomes effective under Massachusetts law is referred to in this Agreement as the “Effective Time.” The parties had agreed in principle on or before August 31, 2006 to substantially all of the material terms and conditions related to the economic and business aspects of the Merger.

2.3  Effect of the Merger. At the Effective Time, (a) the effect of the First Merger shall be as provided in this Agreement, the Articles of Merger, and the applicable provisions of the Massachusetts Business Corporation Law, and (b) the effect of the Second Merger shall be as provided in this Agreement, the Second Merger Certificates and the Massachusetts Business Corporation Law and the Massachusetts Limited Liability Company Act. Without limiting the generality of the foregoing, at the Effective Time, (i) with respect to the First Merger, all the property, rights, privileges, powers, and franchises of Summit and Merger Sub shall vest in First Survivor, and all debts, liabilities, and duties of Summit and Merger Sub shall become the debts, liabilities, and duties of First Survivor, and (ii) with respect to the Second Merger, all the property, rights, privileges, powers, and franchises of Summit and HCSG shall vest in Second Survivor, and all debts, liabilities, and duties of Summit and HCSG shall become the debts, liabilities, and duties of Second Survivor.

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2.4  Constituent Documents. At the Effective Time, (a) the Summit Articles of Organization (as defined in Section 3.1(a)(ii)(B)) and Summit’s Bylaws as in effect immediately prior to the Effective Time, respectively, shall be the Articles of Organization and Bylaws of First Survivor, and (b) HCSG’s Operating Agreement as in effect immediately prior to the Effective Time and in the form of Exhibit “D” attached hereto, as amended by the Second Merger Certificates, shall be the operating agreement of Second Survivor (the “Operating Agreement”).

2.5  Directors and Officers. (a) With respect to the First Merger, the directors of Merger Sub immediately prior to the Effective Time shall be the directors of First Survivor, each to hold office in accordance with the Articles of Organization and Bylaws of First Survivor, and the officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, each to hold office in accordance with the Articles of Organization and Bylaws of the Surviving Corporation, and (b) with respect to the Second Merger, the directors of HCSG immediately prior to the Effective Time shall be the directors of Second Survivor, each to hold office in accordance with the Operating Agreement, and the officers of HCSG immediately prior to the Effective Time shall be the officers of Second Survivor, each to hold office in accordance with the Operating Agreement.

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3.Conversion of Securities; Exchange of Certificates.

3.1  Conversion of Securities.

(a)At the Effective Time, by virtue of the First Merger and without any action on the part of Merger Sub, Summit, Healthcare or the Summit Shareholders:

(ii)Conversion Generally.
 

(A)The shares of Summit common stock, no par value per share (the “Summit Common Stock”) included in the Summit Shares which are issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive the applicable Cash Merger Consideration and Stock Merger Consideration as described on Exhibit “B” attached hereto.

(B)Notwithstanding anything to the contrary set forth in Summit’s Articles of Organization, as amended, in effect immediately prior to the Effective Time (the “Summit Articles of Organization”), or that certain Redemption Agreement, dated June 30, 2005, between Summit and Navone, the shares of Summit Series A Convertible Preferred Stock, no par value per share (the “Summit Preferred Stock”) included in the Summit Shares which are issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive the applicable Cash Merger Consideration and Stock Merger Consideration as described on Exhibit “B” attached hereto.

At the Effective Time, all shares of capital stock of Summit shall no longer be outstanding and shall automatically cease to exist and each certificate previously representing any such shares shall thereafter represent only the right to receive the applicable portion of the Merger Consideration.

(iii)Cancellation of Certain Shares. Each share of Summit capital stock held, immediately prior to the Effective Time, by Summit, Healthcare, or Merger Sub, shall be canceled and extinguished without any conversion thereof, and no payment shall be made with respect thereto.

 

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(iv)Capital Stock of Merger Sub. At the Effective Time, each share of capital stock of Merger Sub that is issued and outstanding immediately prior to the Effective Time will, by virtue of the First Merger and without further action on the part of Healthcare, as the sole stockholder of Merger Sub, be converted into and become one share of common stock of First Survivor (and such share of First Survivor into which the shares of Merger Sub capital stock are so converted shall be the only share of First Survivor’s capital stock that is issued and outstanding immediately after the Effective Time). The certificate evidencing ownership of shares of Merger Sub capital stock will evidence ownership of such share of common stock of First Survivor.
 

(b)At the Effective Time, by virtue of the Second Merger and without any action on the part of Summit, HCSG or Healthcare, each share of capital stock of First Survivor that is issued and outstanding immediately prior to the Effective Time will, by virtue of the Second Merger and without further action on the part of Healthcare, as the then sole stockholder of First Survivor, be converted into and become one unit of membership interest of Second Survivor. The certificate evidencing ownership of shares of First Survivor capital stock will evidence ownership of such unit of membership interest of Second Survivor.

3.2  Exchange of Certificates.

(a)  Exchange Procedures.

(i)At the Effective Time, with respect to the First Merger, Healthcare will deliver to each Summit Shareholder his or its applicable portion of the Stock Merger Consideration.

(ii)Each Summit Share issued and outstanding immediately prior to the Effective Time shall be deemed at all times from and after the Effective Time to represent only the right to receive the Merger Consideration into which each such Summit share is converted in the First Merger in accordance with Section 3.1(a). No interest shall be paid or accrue on any Merger Consideration.

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(b)Cash Payment. At the Effective Time, Healthcare shall pay to each Summit Shareholder his or its applicable portion of the Cash Merger Consideration, and deduct therefrom and deposit with Freni and Richard Hudson, a representative of Healthcare (“Hudson”), as the escrow agents (the “Escrow Agents”) under the Escrow Agreement, the applicable portions of the Escrowed Cash Merger Consideration to be held in escrow pursuant to the Escrow Agreement, all in accordance with the schedule set forth on Exhibit “B” attached hereto.

(c)Further Rights in Summit Shares. Subject to the rights of the Summit Shareholders under Section 14, all Merger Consideration issued and paid upon conversion of the Summit Shares in accordance with the terms of this Agreement shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to such Summit Shares.

3.3Share Transfer Books. At the Effective Time, the share transfer books of Summit shall be closed and, thereafter, there shall be no further registration of transfers of shares of Summit Common Stock and Summit Preferred Stock theretofore outstanding on the records of Summit. From and after the Effective Time, the holders of certificates representing Summit Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Summit Shares, except as otherwise provided in this Agreement or by applicable laws.

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4.Representations and Warranties of Insider Shareholders with Respect to Summit. As a material inducement to Healthcare to enter into this Agreement and to consummate the Merger, each Insider Shareholder, severally and not jointly, makes the following representations and warranties to Healthcare:

4.1Corporate Status, Outstanding Stock.

4.1.1Corporate Status and Outstanding Stock. Summit is a corporation duly organized, validly existing, and in good corporate standing under the laws of the Commonwealth of Massachusetts, has the power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business as a foreign corporation in the jurisdictions in which the failure to be so qualified would have a material adverse effect on the business, assets, condition (financial or otherwise), or operations of Summit, which states in which Summit is so qualified are specified in Schedule 4.1.1.(a). Summit has an authorized capital consisting of (a) Five Hundred Thousand (500,000) shares of Summit Common Stock, and (b) One Hundred Fifty Thousand (150,000) shares of Summit Preferred Stock, the issued and outstanding shares of which are as described in Section C of the Background to this Agreement. All of the issued and outstanding shares of Summit Common Stock and Summit Preferred Stock are validly issued, fully paid, and non-assessable. Except as described on Schedule 4.1.1.(b), there are no shares of Summit’s capital stock held in its treasury. Except as described on Schedule 4.1.1.(c), there are no options, warrants, rights, shareholder agreements, or other instruments or agreements outstanding giving any person or entity the right to acquire any shares of capital stock of Summit, nor are there any commitments to issue or execute any such options, warrants, rights, shareholder agreements, or other instruments or agreements. There are no outstanding stock appreciation rights or similar rights measured with respect to Summit’s capital stock nor are there any instruments or agreements giving anyone the right to acquire any such rights. The minute books and stock records of Summit are complete and accurate in all material respects and all signatures included therein are the genuine signatures of the persons indicated as signing. True, correct, and complete copies of Summit’s minute books and stock records, including the Summit Articles of Organization and By-Laws and all amendments to both, have been delivered to Healthcare. Except as described on Schedule 4.1.1.(d), Summit is not in default under or in violation of any provision of the Summit Articles of Organization or its By-Laws.

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4.2.Due Authorization and Validity of Agreement. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary corporate action on behalf of Summit. This Agreement constitutes the valid and binding obligation of Summit and the Insider Shareholders enforceable against them in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and by general principles of equity, whether considered in a proceeding at law or in equity.

4.3.Officers, Directors, Bank Accounts, etc. Schedule 4.3 discloses all directors and officers of Summit; all bank accounts and safe deposit boxes of Summit; and all persons authorized to sign checks drawn on such accounts and have access to such safe deposit boxes.

4.4.Subsidiaries and Joint Ventures. There is no corporation or other entity in which Summit owns, directly or indirectly, a controlling interest or a majority of the outstanding shares or other equity interest issued by such corporation or entity, nor does Summit own any other capital stock, security, partnership interest, or other interest of any kind, either direct or indirect, in any corporation, partnership, joint venture, association, or other entity.

4.5.Financial Statements. The balance sheets of Summit as of December 27, 2003, December 25, 2004, and December 31, 2005, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended (collectively the “Year-End Financial Statements”), and the balance sheet of Summit as of June 30, 2006, and the related statements of operations, stockholders’ equity, and cash flow for the six-months then ended (the “June 30, 2006 Financial Statements”), copies of all of which are attached as Schedule 4.5., were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), except, in the case of the June 30, 2006 Financial Statements, for the absence of footnotes and year-end adjustments. The Year-End Financial Statements were audited by BDO Seidman, LLP, certified public accountants, whose reports are included with such financial statements. The June 30, 2006 Financial Statements are true and correct in all material respects and fairly present the financial condition and results of operation of Summit as of June 30, 2006 and for the six months then ended.

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4.6Summit Loans. Summit has a working capital loan and an equipment loan (the “Siemens Debt”) from Siemens Capital, the aggregate outstanding balance of which as of June 30, 2006 was Six Million Six Hundred Forty Thousand Two Hundred Sixty-Six Dollars ($6,640,266). Summit also has a loan from Hixon (the “Hixon Debt”), the outstanding balance of which as of June 30, 2006 was One Hundred Fifty One Thousand Four Hundred Seventy Dollars ($151,470). The Siemens Debt and the Hixon Debt, together with all amounts owing by Summit to Boston Private Bank & Trust Company under that certain letter agreement dated May 31, 2006, are hereinafter collectively referred to as the “Summit Loan Obligations.” The aggregate amounts of the respective Summit Loan Obligations outstanding as of the Closing Date are set forth on Schedule 4.6.

4.7Leases.

4.7.1.Summit has no interest in any real estate, except for those leases disclosed on Schedule 4.7.1 (the “Leases”).

4.7.2.Schedule 4.7.1 includes a description of all Leases, including for each its date, the name of the landlord (and owner if different than the landlord), the name of the lessee and any sublessee, the location and use of the property, the monthly base rental payment, any scheduled or formula increases in base rent, the lease expiration date, and all options to renew;

4.7.3.Summit has delivered to Healthcare true and complete copies of all Leases, all amendments and supplements thereto, and all such non-disturbance agreements relating thereto;

4.7.4.except as disclosed on Schedule 4.7.4, Summit has not assigned any Lease or any interest therein or subleased any portion of the properties subject to any Lease;

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4.7.5.each Lease is in full force and effect;

4.7.6Summit is not, and, to the actual knowledge of the Insider Shareholders, each landlord under any Lease is not in default under any Lease, and no event has occurred which, with the giving of notice or passage of time or both, would constitute a default by Summit or, to the actual knowledge of the Insider Shareholders, any landlord under any Lease; and

4.7.7neither the execution or performance of this Agreement, nor the consummation of any of the transactions contemplated herein, will result in a breach of or constitute a default under any of the Leases.

4.8Personal Property.

4.8.1.Except as disclosed on Schedule 4.8, (i) to the actual knowledge of the Insider Shareholders, Summit has good, valid, and marketable title to all tangible personal property reflected on the June 30, 2006 Financial Statements and to all other personal property owned by it, free and clear of all liens, mortgages, pledges, security interests, restrictions, prior assignments, licenses to third parties, encumbrances, and claims of every kind or character, and (ii) all equipment, furniture and fixtures, and other tangible personal property of Summit is in good operating condition and repair, reasonable wear and tear excepted, and except as aforesaid, does not require any repairs other than normal routine maintenance to maintain such property in good operating condition and repair.

4.8.2.The name “Summit Services Group” (the “Mark”) is the only trademark which is used by Summit in the operation of its business. No claim has been asserted against Summit involving any conflict or claim of conflict of the Mark with the marks of others or asserting any rights in the Mark. The Insider Shareholders have no actual knowledge of any basis for any such claim of conflict. To the actual knowledge of the Insider Shareholders, Summit is the sole and exclusive owner of the Mark and has the sole and exclusive right to use the Mark. Within the past five (5) years, Summit has not done business under, and has not been known by, any name other than the Mark.

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4.9Service Agreements. There are listed on Schedule 4.9:

(a)the service agreements under which Summit furnished its services as of June 30, 2006 (“Service Agreements”);

(b)the controlling entity/management company of the Facility;

(c) the address of each Facility to which services are furnished; and

(d) the currently agreed to monthly billing amount.

Each Service Agreement is in substantially the form attached hereto as Exhibit “E”, and no material changes to the form have been made to any Service Agreement.

4.10.Accounts Receivable. Each of the accounts receivable included in the June 30, 2006 Financial Statements constitutes a valid claim in the full amount thereof and was acquired in the ordinary course of business. No account debtor has any valid set-off, deduction, or defense with respect thereto, except as set forth on Schedule 4.10, and no account debtor has asserted any such set-off, deduction, or defense against any single invoice that has been billed to it for an amount in excess of One Thousand Dollars ($1,000.00). The reserve for doubtful accounts reflected on the June 30, 2006 Financial Statements has been properly determined in accordance with GAAP applied on a basis consistent with prior periods.

4.11.Insurance. Summit maintains insurance policies bearing the numbers, for the terms, with the companies, in the amounts, having the named insureds, providing the general coverage, and with the premiums disclosed on Schedule 4.11. All of such policies are in full force and effect. Summit is not in default of any provision thereof and all premiums due with respect to such policies have been paid. Summit has not received notice from any issuer of any policy issued to it of the insurer’s intention to cancel or refusal to renew any such policy issued by such insurer. True, correct, and complete copies of all such policies have been delivered to Healthcare.

4.12No Unrecorded Liabilities. As of June 30, 2006, Summit has recorded all material liabilities required to be recorded under GAAP applied on a basis consistent with prior periods, and has no material liabilities except as and to the extent listed in the June 30, 2006 Financial Statements, disclosed in Schedule 4.12, or as incurred since June 30, 2006 in the ordinary course of business.

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4.13.Service Agreements, Leases, and Other Commitments.

4.13.1.Summit is not a party to or bound by any material written, oral, or implied contract, agreement, lease, power of attorney, guaranty, surety arrangement, or other commitment, including but not limited to any contract or agreement for the purchase or sale of merchandise, equipment, or for the rendition of services, except for the following (which are hereinafter collectively called the “Summit Agreements”):

4.13.1 (a)Service Agreements described on Schedule 4.9 which are in effect effect as of the date of this Agreement;

4.13.1 (b)Leases described on Schedule 4.7.1;

4.13.1 (c)Agreements, documents, and instruments with respect to the Summit Loan Obligations listed on Schedule 4.13.1(c); and

4.13.1 (d)other commitments involving a maximum possible liability or obligation per agreement on the part of Summit of more than Twenty Thousand Dollars ($20,000.00), and such other equipment leases, automobile leases and other contracts and agreements (collectively, the “Other Agreements”), all as described on Schedule 4.13.1(d).

True, correct, and complete copies of all of the Leases and Other Agreements (including all amendments thereto), have been delivered to Healthcare. Healthcare has been given full access to all of the Service Agreements.

4.13.2Full Force and Effect. All of the Summit Agreements are in full force and effect and are valid, binding, and enforceable against the respective parties thereto in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. Except as disclosed on Schedule 4.13.2, Summit and, to the actual knowledge of the Insider Shareholders, all other parties to all of the Summit Agreements, have performed all material obligations required to be performed to date under the Summit Agreements, and neither Summit nor, to the actual knowledge of the Insider Shareholders, any such other party is materially in default or in arrears under the terms thereof, and no condition exists or event has occurred which, with the giving of notice or lapse of time or both, would constitute a default thereunder. Except as disclosed on Schedule 4.13.2, the execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof by Summit, does not and will not, with or without the giving of notice, the lapse of time, or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, or cause any acceleration of, any obligation of Summit under any Summit Agreement. Except as specifically disclosed on Schedule 4.13.2, the Insider Shareholders have not been advised by any party to a Summit Agreement of its intention to terminate or materially amend any Summit Agreement or, if Summit intends to request a renewal of same, of any intention to refuse to renew the same upon expiration of its term.

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4.13.3.There are no outstanding written and oral guaranties made by Summit, which, if accepted, would or could impose any debts, obligations, or liabilities upon Summit.

4.14.Collective Bargaining Agreements and Other Employee Matters. Except as disclosed on Schedule 4.14, Summit:

4.14.1.is not a party to any collective bargaining agreement;

4.14.2.is not a party to any written or oral employment agreement, consulting agreement, or agreement to receive personal services, other than oral agreements at will or which are terminable on not more than thirty (30) days prior notice;

4.14.3.does not maintain any pension and/or retirement plan for any of its employees;

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4.14.4.has not engaged in any transaction prohibited by any law relating to employees or employment relationships; and

4.14.5is not in arrears or default in payment of any obligation with respect to wages, fringe benefits, bonuses, overtime, sick pay, severance pay, improper discharge, vacation pay, time off, insurance premiums, or any other amounts due to employees or due to any plan or arrangement for the benefit of employees, and all amounts required to be accrued for such purposes as of June 30, 2006 under GAAP have been reflected as accruals on the June 30, 2006 Financial Statements.

4.15.Litigation. Except as disclosed on Schedule 4.15, Summit is not a party to or, to the actual knowledge of the Insider Shareholders, threatened, with any suit, action, arbitration, or administrative or other proceeding, either at law or in equity, or governmental investigation, by or before any court, governmental department, commission, board, agency or instrumentality, domestic or foreign. To the actual knowledge of the Insider Shareholders, there is no basis for any suit, action, arbitration, or administrative or other proceeding against Summit which would, individually or in the aggregate, have a material adverse effect on the business, assets, condition (financial or otherwise) or operations of Summit. There is no judgment, decree, award, or order outstanding against Summit. Summit is not contemplating the institution by it of any suit, action, arbitration, administrative, or other proceeding.

4.16.Conflicting Interests. Except as disclosed on Schedule 4.16, no director, officer, or employee of Summit and no Summit Shareholder or relative or affiliate of any of the foregoing (a) has any pecuniary interest in any supplier or customer of Summit or in any other business enterprise with which Summit conducts business or with which Summit is in competition; (b) is indebted to Summit for money borrowed; (c) is a party to any transaction or agreement with Summit (apart from such person’s status as an employee or stockholder as such); or (d) has any business or other interest in conflict with the interests of Summit.

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4.17.Compliance with Law and Regulations. Summit is in compliance in all material respects, and has at all times during the past five (5) years complied in all material respects, with all requirements of law, federal, state, and local, and all requirements of all governmental bodies or agencies having jurisdiction over it, the conduct of its business, the use of its properties and assets, and all premises occupied by it. Without limiting the foregoing, Summit has obtained and now holds all material licenses, permits, certificates, and authorizations needed or required for the current conduct of its business and the use of its properties and the premises occupied by it. Summit has properly filed all material reports and other documents required to be filed with any federal, state, local, and foreign government or subdivision or agency thereof. Summit has not received notice from any federal, state, or local authority or any insurance or inspection body that any of its properties, facilities, equipment, or business procedures or practices fail to comply with any applicable law, ordinance, regulation, building, or zoning law, or requirement of any public authority or body. Summit has never received any notice from any governmental authority or third party of any liability or condition that could lead to exclusion from the Medicare, Medicaid, or similar government programs.

4.18.Agreement Not in Breach of Other Instruments Affecting Summit; Governmental Consents. Except as disclosed on Schedule 4.18., the execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof by Summit: (a) will not, with or without the giving of notice, the lapse of time, or both, result in the imposition of any lien, security interest, or encumbrance on any asset of Summit or in the breach of any of the terms and provisions of, or result in a termination, impairment, or modification of, or constitute a material default under, or conflict with, or cause any acceleration of any obligation of Summit under, or permit any other party to modify or terminate, any agreement, indenture, or other instrument by which Summit is bound, or any of the Summit Articles of Organization or Bylaws, any judgment, decree, order, or award of any court, governmental body, or arbitrator, or any applicable law, rule or regulation, (b) do not require the consent of any governmental authority or other person, and (c) will not result in any material limitation or restriction of any right of Summit.

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4.19.Tax Matters.

4.19.1.“Taxes” shall mean any tax (whether income, excise, customs, sales or use, value added, ad valorem, real or personal property, license, transfer, employment, social security or any other kind of tax or payment in lieu of tax no matter how denominated), or any assessment, levy, impost, withholding, or other governmental charge in the nature of a tax, and shall include all additions to tax, interest, penalties, and fines with respect thereto; and “Returns” shall mean all reports, estimates, information statements, and returns of any nature, including amended versions of any of the foregoing, relating to or required to be filed in connection with any Taxes pursuant to the statutes or regulations of any federal, state, local, or foreign government taxing authority.

4.19.2.Summit has filed all Returns that are required to be filed by it on or prior to the date of this Agreement. All such Returns are true, correct, and complete in all material respects as of their respective filing dates. All Taxes for which Summit is liable and that are due in respect of periods on or prior to the date of this Agreement (including, without limitation, Taxes shown to be due on all filed Returns) have been paid and all Taxes that are required to be withheld or collected by Summit in respect of periods on or prior to the date of this Agreement have been duly withheld and collected and, to the extent required, have been paid to the appropriate governmental authority or properly deposited as required by applicable law, rule or regulation.

4.19.3Except as disclosed on Schedule 4.19.3, no taxing authority has asserted or, to the actual knowledge of the Insider Shareholders, threatened to assert, any adjustment, deficiency, or assessment for any Taxes against Summit, and no basis exists for any such adjustment, deficiency, or assessment. There is no audit or investigation pending or, to the actual knowledge of the Insider Shareholders, threatened, by any taxing authority with respect to any liability for Taxes of Summit.

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4.19.4.There are no currently outstanding requests made by Summit for tax rulings, determinations, or information that could affect the Taxes of Summit payable in respect of periods on or prior to the date of this Agreement.

4.19.5.Schedule 4.19.5 contains a list of all Returns filed with respect to Summit for taxable years ended on December 27, 2003, December 25, 2004, and December 31, 2005. Summit has delivered to Healthcare complete and accurate copies of all such Returns.

4.19.6.Summit has not been obligated to deduct and withhold Taxes under Section 1441 of the Internal Revenue Code (the “Code”).

4.19.7.Except for and in respect of the Summit Bonuses, Summit is not a party to any agreement or arrangement that would result in the payment of any “excess parachute payment” within the meaning of Section 280G of the Code.

4.19.8.Summit has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

4.20.Absence of Certain Actions. Except as set forth on Schedule 4.20, since June 30, 2006, Summit:

4.20.1.has not taken any action outside of the ordinary and usual course of business;

4.20.2.has not increased its Summit Loan Obligations;

4.20.3. has not become contingently liable for any obligation or liability of others;

4.20.4.has paid all of its material debts and obligations as they became due;

4.20.5.has not incurred any material debt, liability, or obligation of any nature to any party except for obligations arising from the purchase of goods or the rendition of services in the ordinary course of business;

4.20.6.has not waived any right of material value;

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4.20.7.has used its reasonable commercial efforts to preserve its business organization intact, to keep available the services of its employees, and to preserve its relationships with its customers, suppliers, and others with whom it deals;

4.20.8.has not lost the services of any regional manager, vice president, or executive officer;

4.20.9.has not been cancelled from any Service Agreement that was in effect as of June 30, 2006; and

4.20.10. has not purchased or redeemed any shares of its capital stock, or transferred, distributed or paid, directly or indirectly, any money or other property or assets to any stockholder or to any other person, other than payment of liabilities included in the June 30, 2006 Financial Statements on or after the scheduled maturity or due date thereof, payment of compensation to shareholders and/or officers for services actually rendered at rates not in excess of the rates as reflected in the June 30, 2006 Financial Statements, and payments in the ordinary course of business for goods and services in arm’s length transactions.

4.21.No Material Adverse Change. Since June 30, 2006, there has not been any material adverse change in the financial condition, business, or affairs of Summit or any material physical damage or loss to any of Summit’s properties or assets or to the premises occupied by Summit (whether or not such damage or loss is covered by insurance).

4.22.Environmental Matters.

4.22.1.Summit has complied in all material respects with all applicable legal requirements of any nature concerning the protection of human health, safety, or the environment, including, without limitation, requirements concerning discharges to the air, soil, surface water, or ground water and concerning the generation, storage, treatment, disposal, or remediation of any waste (collectively, “Environmental Law”), and for dealing with, storage, treatment, and disposal of “hazardous substances,” “pollutants,” “contaminants,” or similarly described materials, as those terms are defined under any Environmental Law.

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4.22.2.Summit owns no property that contains hazardous substances, pollutants, or contaminants as defined under any Environmental Law, polychlorinated biphenyls, asbestos, radon exceeding the action level established by the Environmental Protection Agency, urea formaldehyde foam insulation, or hazardous substance storage tanks.

4.22.3.Summit has never received any notice from any governmental authority or third party of any liability or condition that could give rise to a liability or an obligation on the part of Summit to take remedial action or file reports under any Environmental Law.

4.23.No Broker or Finder. None of Summit or the Insider Shareholders has incurred any obligation, contingent or otherwise, to a broker, finder, agent, or other intermediary for introducing the parties in connection with or otherwise procuring this Agreement or the transactions contemplated hereby.

4.24.Statements and Other Documents Not Misleading. Neither this Agreement, including all Schedules and Exhibits hereto, nor any other document, agreement or other instrument furnished by Summit or the Summit Shareholders to Healthcare at the Closing in connection with the transactions contemplated hereby, contains any untrue statement of any material fact or omits to state any material fact necessary to be stated in order to make any statement contained therein not misleading. There is no fact actually known to Summit or to any Insider Shareholder which materially adversely affects Summit’s business, financial condition, or affairs or any of its properties or assets which has not been set forth in this Agreement, including the Schedules and Exhibits hereto, or in the other documents furnished to Healthcare at the Closing in connection with the transactions contemplated hereby.

4.25.Loans to Officers, Directors, and Shareholders. Except as disclosed on Schedule 4.25, immediately prior to the Closing, no officer, director, or shareholder of Summit was indebted to Summit.

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4.26.Unpaid State Sales Taxes and Waltham Lease. Notwithstanding anything to the contrary set forth in this Section 4 or elsewhere in this Agreement, the Insider Shareholders expressly disclaim and disavow any effect on the accuracy and completeness of the representations and warranties set forth in this Section 4, including, without limitation, Sections 4.5, 4.12, 4.19, 4.20 and 4.21, which may be caused by the existence of the Unpaid State Sales Taxes or the obligations and liabilities of Summit under and in respect of the Waltham Lease (the “Waltham Lease Obligations”), and all of such representations and warranties shall be read and construed without regard to any such effect thereon caused thereby. The agreement of the parties with respect to the Unpaid State Sales Taxes is solely covered by the terms of the Escrow Agreement, and with respect to the Waltham Lease Obligations is solely covered by the Waltham Lease Indemnification Agreement, which agreements contain rights in favor and for the benefit of Healthcare (and Summit) which shall be the sole and exclusive remedies of Healthcare (and Summit) with respect thereto; it being expressly agreed that Healthcare shall have no right to bring any claim for any breach of the representations and warranties set forth in this Section 4 on account of or in any way relating to the Unpaid State Sales Taxes or the Waltham Lease Obligations.

5.Further Representations and Warranties of the Summit Shareholders. As a material inducement to Healthcare to enter into this Agreement and to consummate the Merger, each Summit Shareholder, severally and not jointly, only as to himself or itself, as the case may be, makes the following representations and warranties to Healthcare:

5.1.  Ownership of Capital Stock of Summit. Each Summit Shareholder owns the number of shares of Summit Common Stock or Summit Preferred Stock, as the case may be, set forth opposite such Summit Shareholder’s name in Section C of the Background to this Agreement. Except as disclosed on Schedule 5.1, each Summit Shareholder has good, marketable, and unencumbered title to such shares, free and clear of all liens, security interests, pledges, claims, options, and rights of others.

5.2.Authorization; Valid and Binding Agreement. This Agreement and the other documents and agreements to be executed and delivered by each Summit Shareholder in connection herewith have been, in the case of any Summit Shareholder which is an entity, duly authorized by all necessary corporate or other action and have been or will be when executed and delivered at or prior to the Closing, duly executed and delivered by each Summit Shareholder and constitute, or will constitute when executed and delivered, the legal, valid, and binding obligations of each Summit Shareholder, enforceable against him or it in accordance with their terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. No approval of any governmental body or governmental agency or other third party is required for any Summit Shareholder to consummate the transactions contemplated hereby.

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5.3.Agreement Not in Breach of Other Instruments Affecting the Summit Shareholders. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof by each Summit Shareholder do not and will not, with or without the giving of notice, the lapse of time, or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, any agreement or other instrument (including, without limitation, the Summit Articles of Organization and Bylaws) by which such Summit Shareholder is bound, any judgment, decree, order, or award of any court, governmental body, or arbitrator, or any law, rule or regulation applicable to such Summit Shareholder.

5.4.Shareholders’ Vote. Each Summit Shareholder has voted his or its Summit Shares in favor of the Merger.

5.5.No Broker or Finder. No Summit Shareholder has incurred any obligation, contingent or otherwise, to a broker, finder, agent, or other intermediary for introducing the parties in connection with or otherwise procuring this Agreement or the transactions contemplated hereby.

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6.  Representations and Warranties of Hixon, Pritchard, and Chang.

6.1.  Valid and Binding Agreement. Hixon, Pritchard, and Chang each represents and warrants severally, with respect to himself only, that he has duly executed this Agreement and that this Agreement constitutes his valid and binding obligation, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and by general principles of equity whether considered in a proceeding at law or in equity.

7.  Representations and Warranties of Healthcare. As a material inducement to Summit, the Summit Shareholders and Hixon, Pritchard and Chang to enter into this Agreement and to consummate the Merger, Healthcare makes the following representations and warranties to Summit, the Summit Shareholders, Hixon, Pritchard and Chang:

7.1.  Corporate Status and Authority; Outstanding Stock. Healthcare is a corporation duly organized, validly existing, and in corporate good standing under the laws of the Commonwealth of Pennsylvania, and has the corporate power to consummate the Merger as contemplated hereunder. The authorized capital stock of Healthcare consists of Thirty Million (30,000,000) shares of Healthcare Common Stock. As of June 30, 2006, Twenty Eight Million Eight Hundred Sixty-Six Thousand (28,866,000) shares were issued and outstanding. The execution, delivery, and performance of this Agreement and the other documents and agreements to be executed and delivered by Healthcare in connection herewith have been duly authorized by all necessary corporate action on the part of Healthcare. This Agreement constitutes, and all such other documents and agreements to be executed and delivered by Healthcare will constitute, when so executed and delivered, the valid and binding obligations of Healthcare, enforceable against it in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. No approval of any governmental body or governmental agency or other third party is required for Healthcare to consummate the transaction contemplated hereby.

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7.2.  Status of Healthcare Stock. The shares of Healthcare Common Stock included in the Stock Merger Consideration to be issued pursuant to the terms of this Agreement will be duly authorized, validly issued and outstanding, fully paid, and non-assessable.

7.3.  Agreement Not in Breach of Other Instruments Affecting Healthcare. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof, by Healthcare, do not and will not, with or without the giving of notice, the lapse of time or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with or cause any acceleration of any obligation of Healthcare under, or permit any other party to modify or terminate, any agreement, indenture or other instrument by which Healthcare is bound, or any of Healthcare’s Articles of Incorporation or Bylaws, any judgment, decree, order or award of any court, governmental body or arbitrator, or any applicable law, rule or regulation.

7.4.  Financial Statements. The financial statements of Healthcare as of December 31, 2005, and the fiscal year then ended, audited by Grant Thornton, LLP have been prepared in conformity with GAAP. Since December 31, 2005, there has been no material adverse change in the consolidated financial condition of Healthcare and its subsidiaries.

7.5.  Healthcare’s SEC Filings. Healthcare’s Report on Form 10-K for the year ended December 31, 2005, and Reports on Form 10-Q filed during calendar year 2006, are true, correct and complete in all material respects and do not contain a misstatement of a material fact or fail to state a material fact required to be stated therein or necessary to make the statements made therein not misleading as of the dates such filings were made. Healthcare has filed all documents required to be filed by it with the SEC, each of which when so filed was true, correct and complete in all material respects.

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7.6.  No Broker or Finder; Purchase for Investment. Healthcare has not incurred any obligation, contingent or otherwise, to a broker, finder, agent or other intermediary for introducing the parties in connection with or otherwise procuring this Agreement or the transactions contemplated hereby.

7.7.  No Material Adverse Change. Since June 30, 2006, there has not been any material adverse change in the financial condition, business, or affairs of Healthcare.

7.8.  Statements and Other Documents Not Misleading. Neither this Agreement, including all Schedules and Exhibits hereto, nor any other document, agreement or other instrument furnished by Healthcare to one or more of the Summit Shareholders at the Closing in connection with the transactions contemplated hereby, contains any untrue statement of any material fact or omits to state any material fact necessary to be stated in order to make any statement contained therein not misleading. There is no fact actually known to Healthcare which materially adversely affects Healthcare’s business, financial condition, or affairs or any of its properties or assets which has not been set forth in this Agreement, including the Schedules and Exhibits hereto, or in the other documents furnished to the Summit Shareholders at the Closing in connection with the transactions contemplated hereby.

8.  Continuation and Survival of Representations and Warranties. All representations and warranties contained herein shall survive the Closing Date for a period of one (1) year, except that the representations and warranties set forth in Sections 5 and 7.2 shall survive until the expiration of the applicable statute of limitations. Each representation and warranty contained herein is independent of all other representations and warranties contained herein (whether or not covering an identical or a related subject matter) and must be viewed independently and separately. Exceptions or qualifications to any representations or warranties contained herein shall not be construed as exceptions or qualifications to any other warranty or representation. No representation or warranty contained herein shall be deemed to be waived, affected or impaired by any investigation made by or knowledge of any party to this Agreement.

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9.Closing.

9.1.  Closing Date. The closing of the transactions provided for in this Agreement (the “Closing”) shall take place simultaneously with the execution and delivery of this Agreement (the “Closing Date”), and shall be deemed effective as of the Effective Time. The parties had agreed in principle on or before August 31, 2006 to substantially all of the material terms and conditions related to the economic and business aspects of the Merger.

9.2. Deliveries by the Summit Shareholders at Closing. At the Closing, the Summit Shareholders will deliver or cause to be delivered to Healthcare the following:

9.2.1.  certificates for the Summit Shareholders’ Shares, endorsed by the Summit Shareholders in blank, or with stock transfer powers executed by the Summit Shareholders in blank attached, with all required transfer tax stamps, if any, affixed;

9.2.2.  the Certificate of the Clerk of Summit, dated the Closing Date, that all necessary corporate action by the Summit Board of Directors and Summit Shareholders has been taken to authorize the consummation by Summit of the transactions provided for herein;

9.2.3.  the signed resignations of all directors of Summit dated and effective as of the Closing Date;

9.2.4.  the stock books and records, corporate minute books of Summit (containing the originals of all minutes and resolutions ever adopted or consented to or agreed to by the Summit Shareholders, directors, or any committee of directors of Summit), and the corporate seals of Summit;

9.2.5.  the favorable legal opinion of Bingham McCutchen LLP, counsel for the Summit Shareholders and Summit, respectively, dated the Closing Date, in substantially the form set forth in Exhibit “F” attached hereto.

9.2.6.  a legal existence and corporate good standing certificate for Summit, and a certified copy of the Summit Articles of Organization and all amendments thereto, issued by the Secretary of State of the Commonwealth of Massachusetts and dated as of a date within five (5) days prior to the Closing Date;

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9.2.7.  general releases in favor of Summit executed by each Summit Shareholder and by each Summit Director (to the extent not a Summit Shareholder) in the form attached as Exhibit “G” releasing Summit from all liability to such person.

9.2.8.  certification by each Summit Shareholder pursuant to the Foreign Investment Real Property Tax Act, in the form attached hereto as Exhibit “H”;

9.2.9.  the employment agreements in the form of Exhibits “I-1,” “I-2,” and “I-3” executed by Summit and by each of Cuzzupoli, Bullock, and Freni;

9.2.10.  the Escrow Agreement duly executed and delivered by the Summit Shareholders;

9.2.11.  satisfactory evidence that all indebtedness owing to Summit by any director, officer, employee, or Summit Shareholder has been paid in full on or prior to the Closing Date (other than indebtedness owing to Summit by Maggie Kagas and Edward Dearborn as disclosed on Schedule 4.16); and

9.2.12.  the Waltham Lease Indemnification Agreement, duly executed and delivered by Cuzzupoli.

9.3.  Deliveries by Healthcare at Closing. At the Closing, Healthcare will deliver or cause to be delivered to (or for the benefit of) the Summit Shareholders the following:

9.3.1.  the Cash Merger Consideration (less the Escrowed Cash Merger Consideration) by wire transfer instructions furnished by the Summit Shareholders, and stock certificates evidencing the Stock Merger Consideration;

9.3.2.  the Bonus Employees Loan to Summit to be used by Summit to pay the Summit Bonuses to the Summit Bonus Employees as described in Section I of the Background and as listed on Schedule 9.3.2.; provided that if a Summit Bonus Employee does not execute and deliver the a Release of Rights in form and substance reasonably satisfactory to Healthcare, the Bonus Employees Loan shall be reduced by the amount of the Summit Bonus which would have been paid to such employee (it being agreed, however, that if, following the Closing Date, a Summit Bonus Employee so executes and delivers such a Release of Rights, such employee will at such time receive the Summit Bonus);

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9.3.3.  payment and discharge in full of all of the Summit Loan Obligations;

9.3.4.  a legal existence and corporate good standing certificate for Healthcare issued by the Secretary of State of the Commonwealth of Pennsylvania, and a copy of Healthcare’s Articles of Incorporation and all amendments thereto certified by the Secretary of Healthcare;

9.3.5. the Certificate of the Secretary of Healthcare, dated the Closing Date, that all necessary corporate action by the Board of Directors of Healthcare has been taken to authorize the consummation by Healthcare of the transactions provided for herein;

9.3.6.  the Escrow Agreement duly executed and delivered by Healthcare and Hudson;

9.3.7.  the delivery of the Escrowed Cash Merger Consideration to the Escrow Agents pursuant to the terms of the Escrow Agreement; and

9.3.8.  stamped or certified copies of the Articles of Merger and Second Merger Certificates from the Secretary of State of the Commonwealth of Massachusetts evidencing the effectiveness of the First Merger and the Second Merger, respectively, under the Massachusetts Business Corporation Law and the Massachusetts Limited Liability Company Act, as applicable.

10.  Additional Tax Matters.

10.1.  Filing of Tax Returns; Payment of Taxes.

10.1.1.  Following the Closing, Healthcare shall control the preparation and filing of all Returns required to be filed by Summit after the Closing Date (taking all valid extensions into account). All Returns relating to Summit for tax periods beginning on or prior to the Closing Date shall be prepared in a manner consistent with past Summit practice unless otherwise required by applicable law. Healthcare shall provide the Summit Shareholders with copies of all completed Returns relating to Summit which it prepares for Tax periods beginning on or prior to the Closing Date, including in respect of Summit’s 2006 fiscal year, at least twenty (20) days prior to the due date for filing thereof, along with supporting workpapers and other records and information, for the Summit Shareholders’ review and approval. The Summit Shareholders and Healthcare shall attempt in good faith to resolve any disagreements regarding any such Returns prior to the due date for filing. In the event that the Summit Shareholders and Healthcare are unable to so resolve any dispute with respect to any such Return at least ten (10) days prior to the due date for filing, such dispute shall be resolved pursuant to Section 10.4, which resolution shall be binding on the parties (except to the extent such dispute gives rise to a claim for indemnification under Section 11, in which case such Section 11 shall remain applicable).

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10.1.2.  Following the Closing, Healthcare shall cause to be timely filed all Returns required to be filed by Summit relating to any tax period on or prior to the Closing Date, and pay or cause to be paid all Taxes shown to be due thereon.

10.2.  Tax Audits. If notice of any legal proceeding with respect to Taxes of Summit (a “Tax Claim”) shall be received by any party(ies) hereto for which another party(ies) may reasonably be expected to be liable pursuant to Section 11, the notified party(ies) shall promptly notify such other party(ies) who may be so liable in writing of such Tax Claim, and thereupon the proceedings relating to such Tax Claim shall be governed by the applicable provisions of Section 12.

10.3.  General Cooperation on Tax Matters. Healthcare and Summit, on the one hand, and the Summit Shareholders, on the other hand, shall cooperate fully, as and to the extent reasonably requested by the other party(ies), in connection with the filing of Returns and any audit, litigation or other proceeding with respect to Taxes or that otherwise may be subject to an indemnity under this Section 11, including any Tax Claims. Such cooperation shall include Healthcare’s prompt provision to the Summit Shareholders of copies of such supporting workpapers and other records and information as they may reasonably request in connection with their review of the draft Returns provided by Healthcare to the Summit Shareholders under Section 10.1.1. Such cooperation shall also include the retention and (upon the other party(ies)’s request) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder or to testify at any proceeding. Healthcare agrees, and Healthcare agrees to cause Summit, (a) to retain all books and records with respect to Tax matters relating to Summit for any taxable period beginning on or before the Closing Date until the expiration of the applicable Tax statute of limitations for the applicable taxable period, and to abide by all record retention agreements entered into with any Taxing authority, and (b) to give the other party(ies) reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party(ies) so requests, to allow the other party(ies) to take possession of such books and records.

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10.4.  Disputes. Any dispute as to any matter covered under this Section 10, other than a matter relating to or giving rise to a claim for indemnification under Section 11, shall be resolved by an independent accounting firm mutually acceptable to the Summit Shareholders and Healthcare. The fees and expenses of such accounting firm shall be borne equally by the Summit Shareholders, on the one hand, and Healthcare, on the other hand. If any dispute with respect to a Return is not resolved prior to the due date of such Return, such Return shall be filed in the manner which the party(ies) responsible for preparing such Return deems correct, but the rights and obligations of the parties hereto under this Section  10 with respect thereto shall be adjusted as necessary to and shall conform with the resolution of the dispute by the independent accounting firm relating thereto.

10.5.  Unpaid State Sales Taxes. The provisions of this Section 10 shall not apply to the issue relating to the Unpaid State Sales Taxes disclosed in Section J of the Background to this Agreement. The resolution of that issue shall be governed solely and exclusively by the terms of the Escrow Agreement.

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10.6.Tax Treatment of Merger. Each party hereto agrees to file all Federal and state income tax returns, and to report the Merger and the transactions contemplated herein for all tax reporting and filing purposes, in a manner wholly consistent with the provisions set forth in Section F of the Background to this Agreement, and to take no position for Federal or state tax purposes inconsistent therewith.

11.Indemnification.

11.1.By the Insider Shareholders. Subject to the limitations set forth in Section 11.5, the Insider Shareholders severally agree to indemnify and hold harmless Healthcare and its officers, directors, successors and assigns, from, against and in respect of any and all losses, damages, actions, suits, proceedings, demands, assessments and judgments, and any and all reasonable attorneys’ fees, costs and expenses incident to any of the foregoing (all of the foregoing collectively, “Losses”), arising or resulting from:

(a)any breach of any representation or warranty set forth in Section 4 or any non-fulfillment of any covenant or agreement on the part of the Insider Shareholder Indemnitors or any of them contained in this Agreement (excluding the covenants and agreements set forth in Section 16); and

(b)any error contained in any certificate or other document or instrument delivered by the Insider Shareholders to Healthcare pursuant to this Agreement.

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11.2  .By the Summit Shareholders. Subject to the limitations set forth in Section 11.5 and in addition to the indemnification obligations of the Insider Shareholders set forth in Section 11.1, the Summit Shareholders severally agree to indemnify and hold harmless Healthcare and its officers, directors, successors and assigns from, against and in respect of any and all Losses arising or resulting from:

(a)any breach of any representation and warranty set forth in Section 5 or any non-fulfillment of any covenant or agreement on the part of the Summit Shareholders or any of them contained in this Agreement (including the covenants and agreements set forth in Section 16); and

(b)any error contained in any certificate or other document or instrument delivered by the Summit Shareholders to Healthcare pursuant to this Agreement.

11.3By Hixon, Pritchard and Chang. Subject to the limitations set forth in Section 11.5, Hixon, Pritchard, and Chang severally agree to indemnify and hold harmless Healthcare and its officers, directors, successors and assigns from, against and in respect of any and all Losses arising or resulting from any breach of any representation or warranty set forth in Section 6 or any non-fulfillment of any covenant or agreement on the part of Hixon, Pritchard, or Chang set forth in Section 16.

11.4  By Healthcare. Subject to the limitations set forth in Section 11.5, Healthcare agrees to indemnify and hold harmless the Summit Shareholders, Hixon, Pritchard, and Chang and their respective shareholders, members, managers, officers, directors, successors and assigns from, against and in respect of any and all Losses arising or resulting from:

(a)any breach of any representation and warranty set forth in Section 7 or any non-fulfillment of any covenant or agreement on the part of Healthcare contained in this Agreement (excluding the indemnification obligations of Healthcare contained in Section 14.3 which are separately covered thereunder); and

(b)any error contained in any certificate or other document or instrument delivered by Healthcare to the Summit Shareholders, Hixon, Pritchard or Chang pursuant to this Agreement.

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11.5. Limitations on Indemnification.

11.5.1 No party from whom indemnification is sought hereunder (an “Indemnifying Party”) shall be required to indemnify any other party seeking such indemnification hereunder (an “Indemnified Party”) except to the extent that the aggregate amount of Losses for which the Indemnified Party is otherwise entitled to indemnification pursuant to this Section 11 exceeds $250,000 (the “Indemnification Threshold”), whereupon the Indemnified Party shall be entitled to be paid the excess of the aggregate amount of all such Losses over the Indemnification Threshold (irrespective of whether the Losses aggregating the Indemnification Threshold relate to any Losses in excess of the Indemnification Threshold), subject to the limitations on the maximum amount of recovery set forth in Section 11.5.2. By way of example, if there is a single Loss suffered by Healthcare of $100,000 and another single Loss suffered by Healthcare of $150,000, the amount of any Loss in excess of the aggregate amount of those two Losses suffered by Healthcare shall be paid to Healthcare by the applicable Indemnifying Party(ies). Notwithstanding the foregoing, the Indemnification Threshold shall not apply to any Losses suffered by the Summit Shareholders arising from any breach by Healthcare of its obligations under Section 14, which Losses shall be indemnifiable in full by Healthcare.

11.5.2.The aggregate amount of Losses, in excess of the Indemnification Threshold (to the extent applicable), payable by the Indemnifying Parties under this Section 11 shall be limited as follows:

(a)The aggregate amount of Losses payable by the Insider Shareholders to Healthcare pursuant to Section 11.1 shall be capped, with respect to each Insider Shareholder, at such Insider Shareholder’s respective portion of Three Million Dollars ($3,000,000), which pro rata portions shall be as set forth on Schedule 11.5.2.(a); provided, however, that such pro rata portions of each such Insider Shareholder’s liability under this Section 11.5.2(a) shall be reduced by the amount of any Losses payable by such Insider Shareholder as a “Summit Shareholder” under Section 11.5.2(b).

(b)The aggregate amount of Losses payable by the Summit Shareholders to Healthcare pursuant to Section 11.2 shall be capped, with respect to each Summit Shareholder, at the respective portion of the Purchase Price payable to each such Summit Shareholder in accordance with the allocation set forth in Exhibit “B” attached hereto; provided, however, that such respective portions of each such Summit Shareholder’s liability under this Section 11.5.2(b) shall be reduced by the amount of any Losses payable by such Summit Shareholder as an “Insider Shareholder” (to the extent applicable) under Section 11.5.2(a). No Summit Shareholder shall be liable in any way to Healthcare on account of any other Summit Shareholder’s liability to Healthcare under Section 11.2, including on account of any breach of any covenant or agreement set forth in Section 16.

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(c) The aggregate amount of Losses payable by Hixon, Pritchard and Chang to Healthcare pursuant to Section 11.3 shall be capped, with respect to each such person, at the respective pro rata amounts set forth on Schedule 11.5.2(c). None of Hixon, Pritchard and Chang shall be liable in any way to Healthcare on account of the liability of either or both of the other named persons to Healthcare under Section 11.3.

(d) The aggregate amount of Losses payable by Healthcare to the Summit Shareholders, Hixon, Pritchard, and Chang pursuant to Section 11.4 shall be capped at the aggregate amount of the Stock Merger Consideration.

(e) For the avoidance of doubt, in the event that a single claim is brought (or separate claims are brought) by Healthcare under this Section 11 against Wellfleet and Chang, on the one hand, or Navone, Hixon and/or Pritchard, on the other hand, arising from the same claim or same set of circumstances giving rise to such claim, the liability of Wellfleet and Chang, on the one hand, or Navone, Hixon and/or Pritchard, on the other hand, shall not be additive but shall be limited to the single largest amount under Section 11.5.2.(b) or (c), as the case may be. By way of example, if Healthcare brings a claim for indemnification under Section 11 against both Wellfleet and Chang asserting a violation of a restrictive covenant under Section 16, the amount to which Healthcare will be entitled to recover if successful will be capped at the portion of the Merger Consideration payable to Wellfleet in accordance with Exhibit “B” attached hereto (which amount is also the same amount allocable to Chang on Schedule 11.5.2(c)); if, on the other hand, Healthcare brings a claim for indemnification under Section 11 against both Navone and Pritchard asserting a violation of a restrictive covenant under Section 16, the amount to which Healthcare will be entitled to recover if successful will be capped at the portion of the purchase price payable to Navone in accordance with Exhibit “B” attached hereto (which amount is greater than the amount allocable to Pritchard on Schedule 11.5.2(c)).

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11.5.3.No Indemnifying Party shall be liable for any Losses pursuant to this Section 11 unless a written claim for indemnification in accordance with Section 11.6 is given by the Indemnified Party to the Indemnifying Party with respect thereto within one (1) year after the Closing, except that this time limitation shall not apply to (a) any Losses related to or arising directly or indirectly out of any claim for indemnification made by Healthcare under (i) Section 11.2 with respect to any breach of any representation or warranty made by the Summit Shareholders in Section 5, or (ii) Sections 11.2 or 11.3 with respect to any breach by the Summit Shareholders, Hixon, Pritchard or Chang of the covenants and agreements under Section 16, as to which in each such case a written claim for indemnification in accordance with Section 11.6 is given by Healthcare to the applicable Indemnifying Party with respect thereto within the applicable statute of limitations, and (b) any Losses related to or arising directly or indirectly out of any claims for indemnification made by the Summit Shareholders under Section 14.3, as to which a written claim for indemnification in accordance with Section 11.6 is given by the applicable Summit Shareholders to Healthcare with respect thereto within the applicable statute of limitations.

11.5.4.Healthcare acknowledges that it has been afforded the opportunity to conduct a full due diligence investigation of Summit. Accordingly, Healthcare shall have no right to bring any claim for indemnification against the Insider Shareholders or the Summit Shareholders arising from or relating to any matter that was actually known to Healthcare as of the Closing Date.

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11.5.5. All Losses shall be determined, and any indemnification in respect of Losses shall be made, net of any tax benefits actually realized by the Indemnified Party by reason of the matter giving rise to such Losses.

11.6.Procedures for Indemnification Claims.

11.6.1. In the event that any claim shall be asserted against any Indemnified Party which, if sustained, would result in such Indemnified Party suffering a Loss, such Indemnified Party shall, within fifteen (15) days after learning of such claim, notify the applicable Indemnifying Party(ies) of the existence, nature and amount of such claim and shall extend to the applicable Indemnifying Party(ies) a reasonable opportunity to defend against such claim at the Indemnifying Party(ies)’ sole expense and through legal counsel satisfactory to the Indemnified Party, such satisfaction not to be withheld or delayed unreasonably; provided, that the Indemnifying Party(ies) proceed in good faith, expeditiously and diligently. No effort to recover the amount of the Losses related to such claim shall be made by an Indemnified Party while such defense is still being made until the earlier of (a) the resolution of said claim by the applicable Indemnifying Party(ies) with the claimant, or (b) the termination of the defense by the applicable Indemnifying Party(ies) against such claim or the failure of the Indemnifying Party(ies) to prosecute such defense in good faith in an expeditious and diligent manner. Any Indemnified Party shall, at its option and sole expense, have the right to participate in any defense undertaken by any applicable Indemnifying Party(ies) with legal counsel of its own selection. No settlement or compromise of any claim which may result in a Loss may be made by the Indemnifying Party(ies) without the prior written consent of the Indemnified Party unless, prior to such settlement or compromise, the Indemnifying Party(ies) acknowledge in writing their obligation to pay in full the amount of the settlement or compromise and all associated expenses and the Indemnified Party is furnished with security reasonably satisfactory to the Indemnified Party that the applicable Indemnifying Party(ies) will in fact pay such amount and expenses.

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11.6.2.Any Indemnified Party and Indemnifying Party(ies) may agree in writing, at any time, as to the existence and amount of a claim and the resulting Loss attributable thereto and, upon the execution of such agreement, such claim and Loss shall be deemed established.

11.7.Payment of Losses. Any Indemnifying Party(ies) shall pay in cash the amount of each established Loss to the Indemnified Party within ten (10) days after the final establishment and resolution thereof.

11.8.Remedy Exclusive. Subject to the provisions of Sections 10 and 16, and except for Losses resulting from a party’s fraud, gross negligence, or wilfull misconduct, the remedies of the parties under this Section 11 shall be the exclusive remedies for and in respect of all breaches of this Agreement.

11.9.  Unpaid State Sales Taxes and Waltham Lease. Notwithstanding anything to the contrary set forth in this Section 11 or elsewhere in this Agreement, this Section 11 shall not apply to, and Healthcare shall not have any right to bring any claim for indemnification with respect to, the Unpaid State Sales Taxes or the Waltham Lease Obligations. The agreement of the parties with respect to the Unpaid State Sales Taxes is solely covered by the terms of the Escrow Agreement, and with respect to the Waltham Lease Obligations is solely covered by the Waltham Lease Indemnification Agreement, which agreements contain rights in favor and for the benefit of Healthcare (and Summit) which shall be the sole and exclusive remedies of Healthcare (and Summit) with respect thereto.

12.Confidentiality; Publicity. The parties acknowledge that the transaction contemplated by this Agreement is of a confidential nature. Healthcare is a publicly-held company and will make the appropriate disclosures after this Agreement is executed. The Summit Shareholders, Hixon, Pritchard, and Chang shall not make any disclosures about the transactions contemplated hereby until after Healthcare makes its initial disclosures regarding same.

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13.Securities Laws Compliance Procedures.

13.1.  Knowledge Respecting Healthcare. Each Summit Shareholder represents and warrants that (a) such Summit Shareholder understands that the shares of Healthcare Common Stock included in the Stock Merger Consideration have not been registered under the 1933 Act nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon their representations contained herein; (b) such Summit Shareholder is an “accredited investor” as defined under Rule 501 promulgated under the 1933 Act; (c) such Summit Shareholder is a sophisticated investor with knowledge and experience in business and financial matters, knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of Healthcare which such Summit Shareholder deems relevant to make a fully informed decision regarding the consummation of the transactions contemplated hereby and is able to bear the economic risk and lack of liquidity inherent in holding such Summit Shareholders’ respective shares of Healthcare Common Stock included in the Stock Merger Consideration; (d) such Summit Shareholder has been supplied with the information necessary to obtain from the Internet copies of all Forms 10-K, 10-Q and 8-K, and all proxy statements, filed by Healthcare during calendar years 2005 and 2006; (e) such Summit Shareholder has been afforded an opportunity to ask questions of, and receive answers from, representatives of Healthcare concerning the business and operations of Healthcare, and all other matters deemed relevant to such Summit Shareholder; and (f) such Summit Shareholder has had an opportunity to evaluate all information regarding Healthcare as such Summit Shareholder has deemed necessary or desirable in connection with the transactions contemplated by this Agreement, has independently evaluated the transactions contemplated by this Agreement and has reached such Summit Shareholder’s own decision to enter into this Agreement. Without limiting the foregoing, each Summit Shareholder understands and acknowledges that neither Healthcare nor anyone acting on its behalf has made any representations or warranties other than those contained herein respecting Healthcare or the future conduct of Healthcare’s business or of Summit’s business, and no Summit Shareholder has relied upon any representations or warranties other than those contained herein in the belief that they were made on behalf of Healthcare.

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13.2.  Status of Shares to be Issued. Each Summit Shareholder represents, warrants, agrees, acknowledges, and confirms that such Summit Shareholder has been advised and understands as follows:

13.2.1.  Such Summit Shareholder is acquiring the shares of Healthcare Common Stock included in the Stock Merger Consideration to be issued to such Summit Shareholder for such Summit Shareholder’s own account and without a view to any distribution or resale thereof, other than a distribution or resale which, in the opinion of counsel for such Summit Shareholder (which opinion shall be satisfactory in form and substance to Healthcare), may be made without violating the registration provisions of the Securities Act of 1933, as amended (the “1933 Act”) or any applicable blue sky laws. Such Summit Shareholder has no present intention of selling, granting any participation in, or otherwise distributing the shares of Healthcare Common Stock included in the Stock Merger Consideration acquired by such Summit Shareholder, subject to the provisions of Section 14. Such Summit Shareholder has no contract, undertaking, agreement or arrangement to sell or transfer, or grant any participation, with respect to any shares of Healthcare Common Stock included in the Merger Consideration to be acquired by such Summit Shareholder. Such Summit Shareholder acknowledges that unless and until the shares of Healthcare Common Stock included in the Stock Merger Consideration are registered pursuant to Section 14, such shares of Healthcare Common Stock are “restricted securities” within the meaning of Rule 144 under the 1933 Act and have not been registered under the 1933 Act or any state securities laws and must be held indefinitely unless they are subsequently registered under the 1933 Act or an exemption from such registration is available.

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13.2.2.  At the Closing, there shall be endorsed on the certificates evidencing the shares of Healthcare Common Stock included in the Stock Merger Consideration delivered at Closing a legend substantially similar to the following:

“THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”) OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION AND ARE “RESTRICTED SECURITIES” AS DEFINED BY RULE 144 UNDER THE 1933 ACT. THE SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR DISTRIBUTED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE SHARES UNDER THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE REQUIRING SUCH REGISTRATION, OR IN LIEU THEREOF, AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY TO THE ISSUER OF THE SHARES, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACTS.

13.2.3. Except under certain limited circumstances, the above restrictions on the transfer of the shares of Healthcare Common Stock included in the Stock Merger Consideration will also apply to any and all shares of capital stock or other securities of Healthcare issued or otherwise acquired with respect to such shares, including, without limitation, shares and securities issued or acquired as a result of any stock dividend, stock split or exchange or any distribution of shares or securities pursuant to any corporate reorganization, reclassification or similar event of Healthcare.

13.2.4.  Healthcare and its transfer agent may refuse to effect a transfer of any of the shares of Healthcare Common Stock included in the Stock Merger Consideration by the Summit Shareholders or any of their successors, personal representatives or assigns in violation of the provisions of this Section 13.

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14. Registration of Healthcare Shares.

14.1. Healthcare agrees that by October 8, 2006, Healthcare will file, at is sole cost and expense, a registration statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) which seeks to register for resale all of the shares of Healthcare Common Stock included in the Stock Merger Consideration acquired by the Summit Shareholders at the Closing (all such shares of Healthcare Common Stock, for purposes of this Section 14, the “Registrable Securities”). Healthcare will use its best efforts to cause the Registration Statement to comply in all material respects with all requirements of the 1933 Act and the Commission and to become effective as soon as commercially practicable and remain continuously effective thereafter until the earlier of (a) the date all of the Registrable Securities covered by the Registration Statement have been sold, or (b) two (2) years following the date the Registration Statement is declared effective by the Commission (the “Effectiveness Period”). Healthcare shall prepare and file with the Commission such amendments to the Registration Statement and supplements to the prospectus contained therein (as may be amended or supplemented from time to time, the “Prospectus”) as may be necessary to keep the Registration Statement effective and the Registration Statement and Prospectus accurate and complete during such period that the Registration Statement is required to remain effective as aforesaid. In addition, Healthcare will use its best efforts to register or qualify, at its sole cost and expense, the resale of the Registrable Securities under such state securities or blue sky laws of such jurisdictions as the Summit Shareholders may reasonably request, to keep each such registration or qualification effective during the period the Registration Statement is required to be kept effective by Healthcare as provided above, and to do any and all other acts which may be reasonably necessary or advisable to enable the Summit Shareholders to consummate the disposition of Registrable Securities in such states. Notwithstanding anything to the contrary set forth in this Agreement, including this Section 14, in the event that (i) the Registration Statement is not filed by October 8, 2006, or (ii) the Commission does not declare the Registration Statement effective by January 31, 2007, then in either such case each Summit Shareholder shall have the absolute and unrestricted right at any time during the 30-day period after, (A) in the case of clause (i) above, October 8, 2006, and (B) in the case of clause (ii) above, January 31, 2007, upon in either such case not less than ten (10) days’ prior written notice to Healthcare (any such written notice, a “Stock Tender Notice”), to tender all or any portion of his or its Registrable Securities to Healthcare in exchange for a cash payment equal to the number of such Registrable Securities so tendered multiplied by Twenty-One Dollars ($21.00) per share (the “Per Share Tender Price”); it being agreed that the number of Registrable Securities to be so redeemed and the Per Share Tender Price shall be equitably adjusted in the event of any stock splits, stock dividends, combinations, recapitalizations, reorganizations or other similar events affecting the Healthcare Common Stock. After its receipt of any Stock Tender Notice, Healthcare shall pay in full by wire transfer to the applicable Summit Shareholder furnishing such notice any cash payment required hereunder on the tenth (10^th) day following the date of the applicable Stock Tender Notice.

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14.2.In connection with the obligations of Healthcare to file the Registration Statement under Section 14.1, Healthcare agrees during the Effectiveness Period to:

(a)upon request, furnish to each Summit Shareholder such number of copies of the Registration Statement and Prospectus, and each amendment and supplement thereto, and such other documents as each Summit Shareholder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by each Summit Shareholder, and in connection herewith, Healthcare consents to the use of the Prospectus by each Summit Shareholder in connection with the offering and sale of the Registrable Securities;

(b)notify the Summit Shareholders in writing of the happening of any event as a result of which the Prospectus contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any Summit Shareholder, promptly prepare (and, when completed, furnish written notice to each Summit Shareholder of same) a supplement or amendment to the Prospectus so that, as thereafter delivered to any purchasers of the Registrable Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided, that upon any such notification by Healthcare, each Summit Shareholder will not offer or sell any Registrable Securities until Healthcare has notified each Summit Shareholder that Healthcare has prepared a supplement or amendment to the Prospectus and delivered copies thereof to each Summit Shareholder;

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(c)cause all Registrable Securities to be listed, prior to the date of the first sale of any Registrable Securities pursuant to the Registration Statement, on each securities exchange on which the Healthcare Common Stock is listed;

(d)in the event of the issuance of any stop order suspending the effectiveness of the Registration Statement, or of any order suspending or preventing the use of the Prospectus or suspending the qualification of any Registrable Securities for sale in any jurisdiction, Healthcare will use its best efforts to promptly obtain the withdrawal of any such order; and

(e)obtain, at the time the Commission is to declare the Registration Statement effective, an opinion or opinions, reasonably acceptable to the Summit Shareholders in form and substance, from securities counsel to Healthcare.

14.3.Healthcare will indemnify and hold harmless each Summit Shareholder from and against any and all Losses arising out of or based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus or other document incident to any registration, qualification or compliance or any omission or alleged omission to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Healthcare of any rule or regulation promulgated under the 1933 Act applicable to Healthcare and relating to any action or inaction required of Healthcare in connection with any such registration, qualification or compliance; provided, however, that Healthcare will not be liable in any such case if and to the extent that any such Loss arises out of or is based on any untrue statement or omission based upon written information furnished to Healthcare in any instrument duly executed by a Summit Shareholder and stated to be specifically or use in the Registration Statement or Prospectus. Notwithstanding anything to the contrary set forth in Section 11 or this Section 14.3, the limitations on indemnification under Section 11.5 shall not apply to any claim for indemnification under this Section 14.3, but the procedures applicable to indemnification claims under Section 11.6 shall apply thereto and be followed.

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15.  Further Assurances. Each party to this Agreement agrees to execute and deliver all such other instruments and take all such other action as any party may reasonably request from time to time, before or after Closing and without payment of further consideration, in order to effectuate the transactions provided for herein. The parties shall cooperate fully with each other and with their respective counsel and accountants in connection with any steps required to be taken as part of their respective obligations under this Agreement, including, without limitation, the preparation of financial statements and tax returns, subject to the provisions of Section 10.

16. Restrictive Covenants.

16.1. Covenant Not To Compete.

(a)With respect to Cuzzupoli and Bullock, for a period of the longer of (i) six (6) years following the Closing Date, and (ii) six (6) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, carry on or be engaged or interested in (whether as employee, sole proprietor, partner, consultant, or owner (other than as a passive investor owning less than five percent (5%) of the publicly traded equity securities of any company)) any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis, in any form whatsoever, which services healthcare institutions within the continental United States.

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(b)With respect to Freni, for a period of the longer of (i) three (3) years following the Closing Date, and (ii) three (3) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, carry on or be engaged or interested in (whether as employee, sole proprietor, partner, consultant, or owner (other than as a passive investor owning less than five percent (5%) of the publicly traded equity securities of any company)) any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis, in any form whatsoever, which services health care institutions within the continental United States.

(c)With respect to Chang, Wellfleet, Navone, Hixon, and Pritchard, for a period of six (6) years following the Closing Date, he/it will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, carry on or be engaged or interested in (whether as employee, sole proprietor, partner, consultant, or owner (other than as a passive investor owning less than five percent (5%) of the publicly traded equity securities of any company)) any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis, in any form whatsoever, which services health care institutions within the continental United States.

16.2. Covenant Not To Solicit Clients Or Accounts.

(a)With respect to Cuzzupoli and Bullock, for a period of the longer of (i) six (6) years following the Closing Date, and (ii) six (6) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, solicit or accept any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis from any clients or accounts that were clients or accounts (or legal successors to clients or accounts) of Summit or Healthcare within eighteen (18) months prior to his separation from Summit or Healthcare.

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(b)With respect to Freni, for a period of the longer of (i) three (3) years following the Closing Date, and (ii) three (3) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, solicit or accept any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis from any clients or accounts that were clients or accounts (or legal successors to clients or accounts) of Summit or Healthcare within eighteen (18) months prior to his separation from Summit or Healthcare.

(c)With respect to Chang, Wellfleet, Navone, Hixon, and Pritchard, for a period of six (6) years following the Closing Date, he/it will not, either solely or jointly with, or as manager or agent for, any person, corporation, trust, joint venture, partnership, or other business entity, directly or indirectly, solicit or accept any housekeeping, laundry, linen, and/or food services business which is conducted on a contract basis from any clients or accounts that were clients or accounts (or legal successors to clients or accounts) of Summit or Healthcare within eighteen (18) months prior to Closing.

16.3.  Covenant Not To Solicit Or Hire Employees.

(a)With respect to Cuzzupoli and Bullock, for a period of the longer of (i) six (6) years following the Closing Date, and (ii) six (6) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, directly or indirectly, solicit for employment, hire, or offer employment to, or otherwise aid or assist any person or entity other than Summit or Healthcare, in soliciting for employment, hiring, or offering employment to, any employee of Summit or Healthcare, or former employee of Summit or Healthcare who was employed by Summit or Healthcare within six (6) months before the cessation of his employment.

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(b)With respect to Freni, for a period of the longer of (i) three (3) years following the Closing Date, and (ii) three (3) years after his employment with Summit or with Healthcare has been terminated, for any reason, he will not, directly or indirectly, solicit for employment, hire, or offer employment to, or otherwise aid or assist any person or entity other than Summit or Healthcare, in soliciting for employment, hiring, or offering employment to, any employee of Summit or Healthcare, or former employee of Summit or Healthcare who was employed by Summit or Healthcare within six (6) months before the cessation of his employment.

(c)With respect to Chang, Wellfleet, Navone, Hixon, and Pritchard, for a period of six (6) years following the Closing Date, he/it will not, directly or indirectly, solicit for employment, hire, or offer employment to, or otherwise aid or assist any person or entity other than Summit or Healthcare, in soliciting for employment, hiring, or offering employment to, any employee of Summit or Healthcare, or former employee of Summit or Healthcare who was employed by Summit or Healthcare within six (6) months prior to the Closing Date.

16.4. Covenant Not To Use Or Disclose Confidential Information. The Summit Shareholders, Chang, Hixon, and Pritchard shall not at any time use for his or its personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person or entity, any Confidential Information of Summit or Healthcare. “Confidential Information,” as used in the preceding sentence, means any information regarding Summit’s or Healthcare’s business methods, business policies, procedures, techniques, research, or development projects or results; historical or projected financial information, budgets, trade secrets or other knowledge or processes of or developed by Summit or Healthcare, any names, addresses, and specialized requirements of clients or accounts or any such data on or relating to past, present, or prospective clients or accounts of Summit or Healthcare; or any other confidential information relating to or dealing with the business, operations, or activities of Summit or Healthcare, excepting in each case information otherwise lawfully known generally by, or readily accessible to, the trade or the general public.

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16.5. Remedies for Breach. Each Summit Shareholder, Chang, Hixon, and Pritchard acknowledges that the restrictions contained in this Section 16 are reasonable and necessary in order to protect Healthcare’s legitimate interests and that any violation thereof would result in irreparable injury to Healthcare. Each Summit Shareholder, Chang, Hixon, and Pritchard therefore acknowledges and agrees that, in the event of any violation thereof, Healthcare shall be authorized and entitled to obtain, from any court of competent jurisdiction, preliminary and permanent injunctive relief as well as an equitable accounting of all profits or benefits arising out of such violation, which rights and remedies shall be cumulative and in addition to any other rights or remedies to which Healthcare may be entitled. Each subsection in this Section 16 is separable from every other, and constitutes a separate and distinct covenant. If any provision, paragraph, or subsection of this Section 16 is determined to be unenforceable because it is excessively broad as to time, duration, geographical scope, activity, or subject, the parties agree that the applicable court shall have the power to limit and reduce the offending portion(s) and/or to delete such specific words or phrases which such court shall deem necessary to permit enforcement of the covenants in this Section 16 to the maximum extent compatible with the applicable law as it then appears.

16.6. Extension of Restriction. In the event of any breach or violation of any of the restrictions contained in this Section 16, the time period therein specified shall abate during the time of any violation thereof and that portion remaining at the time of commencement of any violation shall not begin to run until such violation has been fully and finally cured.

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17. Miscellaneous.

17.1. Resolution of Disputes.

(a) If there is a dispute between or among the parties arising under or related to this Agreement, each party agrees that any legal proceeding

(i) instituted by Healthcare, Merger Sub, HCSG, and/or Summit may be instituted only in the Court of Common Pleas of Bucks County, Pennsylvania or in the United States District Court for the Eastern District of Pennsylvania and,

(ii) instituted by the Summit Shareholders, Hixon, Pritchard, and/or Chang may be instituted only in the State Courts sitting in Suffolk County, Boston, Massachusetts or in the United States District Court for the District of Massachusetts sitting in Boston, Massachusetts.

Each party irrevocably consents to the jurisdiction and venue of each of such courts and agrees that the service of any applicable complaint or other process may be made as provided in the applicable Rules of Court or as provided in Section 17.2 of this Agreement.

(b)If any party hereto incurs costs or expenses as a result of any dispute arising under or related to this Agreement, including legal fees or costs, the prevailing party in that dispute shall be paid, upon demand, and from time-to-time, by the non-prevailing party, all of those costs and expenses (i.e., losing party pays).

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17.2.Notices. All notices and other communications given in connection with this Agreement shall be in writing and shall be deemed to have been duly made if delivered in person, or deposited with a same day or overnight courier, to the following:

If to: Healthcare:	3220 Tillman Drive, Suite 300 Glenview Corporate Center Bensalem, PA 19020 Attn: Mr. Thomas Cook, President
With a copy to:	Gerald J. McConomy, Esquire Knapp McConomy Merlie LLP 1216 Route 113, P.O. Box 487 Chester Springs, PA 19425
If to: Merger Sub	3220 Tillman Drive, Suite 300 Glenview Corporate Center Bensalem, PA 19020 Attn: Mr. Thomas Cook, President
With a copy to:	Gerald J. McConomy, Esquire Knapp McConomy Merlie LLP 1216 Route 113, P.O. Box 487 Chester Springs, PA 19425
If to: Summit:	2310 Washington Street, Suite 100 Newton Falls, MA 02462 Attn: Joseph S. Cuzzupoli, President
With a copy to:	Andrew B. White, Esquire Bingham McCutchen LLP 150 Federal Street Boston, MA 02110
If to Cuzzupoli:	10 Old Colony Road Weston, MA 02493
If to Bullock:	226 Commonwealth Avenue, Unit #1 Boston, MA 02116
If to Freni:	5 Milberry Lane Acton, MA 01720
If to Wellfleet/Chang:	245 First Street, 18th Floor Cambridge, MA 02142
If to Navone:	559 Williams Street Denver, CO 80218
If to Hixon:	165 Butler Drive Ridgeland, MS 39157
If to Pritchard:	559 Williams Street Denver, CO 80218

Any address or number may be changed in accordance with the provisions of this Section 17.2.

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17.3.Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, without regard to conflicts of laws principles, except that the provisions of Sections 2 and 3 relating to the Merger shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts.

17.4.Binding Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties to this Agreement, and their respective heirs, executors, successors, and assigns. Healthcare shall not assign its rights or obligations hereunder without the Summit Shareholders’ prior written consent, and no such assignment, notwithstanding the Summit Shareholder’s consent, shall relieve Healthcare from liability for performance of the obligations to be performed pursuant to this Agreement.

17.5.Expenses. Each party to this Agreement shall bear all costs, charges, and expenses incurred by the party in connection with this Agreement and the consummation of the transaction contemplated by this Agreement including, but not limited to, the fees of the respective counsel.

17.6.Entire Agreement. This Agreement and all Exhibits and Schedules hereto constitute the entire agreement between the parties without respect to the subject matter hereof, and their prior negotiations and agreements with respect to such subject matter, whether written or oral, are merged into this Agreement.

17.7.Amendments and Waivers. This Agreement may only be amended by a written instrument duly executed and delivered by all of the parties hereto. No waiver of any provision of this Agreement shall be effective unless in writing duly executed and delivered by the party against whom such waiver is to be enforced.

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17.8.Severability. In the case one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement; but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein and such provision or part of a provision, shall be reformed so that it would be valid, legal, and enforceable to the maximum extent applicable.

17.9.Use of Defined Terms. All words used herein in the singular or plural shall be deemed to have been used in the plural or singular where the context or construction so requires. Any defined term shall indicate all or any number of the members of the relevant class.

17.10.Counterparts and Facsimiles. This Agreement may be executed in counterparts, each of which shall be deemed an original, and will be effective when all parties hereto have executed the original or a counterpart of this Agreement. Facsimile counterparts, containing a signature of a party hereto, shall also be deemed an original for purposes of this Agreement.

[Signatures on Following Pages]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

HEALTHCARE SERVICES GROUP, INC.
By:
	Thomas Cook, President

HCSG, INC.
By:
	Thomas Cook, President

HCSG MERGER, LLC
By:
	Thomas Cook, President

SUMMIT SERVICES GROUP, INC.
By:
	Joseph S. Cuzzupoli
	President

Joseph S. Cuzzupoli

John A. Bullock

Lawrence G. Freni

WELLFLEET CAPITAL PARTNERS, INC.

P.H. Benjamin Chang

NAVONE INVESTMENTS, LLC

S. Keith Pritchard, President

Thomas G. Hixon, S. Keith Pritchard and P.H. Benjamin Chang are executing this Agreement, in consideration of the amounts payable to Navone Investments, LLC and Wellfleet Capital Partners under this Agreement and intending to be legally bound, but are bound only by the provisions of Sections 1, 6, 8, 9, 11, 12, 15, 16 and 17 of this Agreement.

Thomas G. Hixon

S. Keith Pritchard

P.H. Benjamin Chang

EXHIBIT “A-1”

ESCROW AGREEMENT

EXHIBIT “A-2”

WALTHAM LEASE INDEMNIFICATION AGREEMENT

EXHIBIT “B”

ALLOCATION OF MERGER CONSIDERATION

EXHIBIT “D”

FORM OF HCSG MERGER LLC OPERATING AGREEMENT

EXHIBIT “E”

FORM OF SERVICE AGREEMENTS

EXHIBIT “F”

OPINION OF BINGHAM McCUTCHEN LLP

EXHIBIT “G”

GENERAL RELEASES IN FAVOR OF SUMMIT

EXHIBIT “H”

CERTIFICATION BY EACH SUMMIT SHAREHOLDER

PURSUANT TO THE FOREIGN INVESTMENT REAL PROPERTY TAX ACT

EXHIBIT “I-1”

EMPLOYMENT AGREEMENT OF JOSEPH S. CUZZUPOLI

EXHIBIT “I-2”

EMPLOYMENT AGREEMENT OF JOHN A. BULLOCK

EXHIBIT “I-3”

EMPLOYMENT AGREEMENT OF LAWRENCE G. FRENI

SCHEDULE 4.1.1(a)

STATES IN WHICH SUMMIT IS QUALIFIED

SCHEDULE 4.1.1(b)

SUMMIT’S CAPITAL STOCK

SCHEDULE 4.1.1(c)

SUMMIT’S OPTIONS, WARRANTS, RIGHTS,

SHAREHOLDER AGREEMENTS OR OTHER INVESTMENTS

SCHEDULE 4.1.1(d)

DEFAULTS OR VIOLATIONS OF ARTICLES OF ORGANIZATION OR BYLAWS

SCHEDULE 4.3

OFFICERS, DIRECTORS, BANK ACCOUNTS,

SAFE DEPOSIT BOXES, AUTHORIZED PERSONNEL

SCHEDULE 4.5

FINANCIAL STATEMENTS

SCHEDULE 4.7.1

LEASES

SCHEDULE 4.7.4

ASSIGNMENT OR SUBLET OF LEASE INTERESTS

SCHEDULE 4.8

PERSONAL PROPERTY EXCEPTIONS

SCHEDULE 4.9

SERVICE AGREEMENTS

SCHEDULE 4.10

ACCOUNTS RECEIVABLE, SET-OFFS, DEDUCTIONS OR DEFENSES

SCHEDULE 4.11

INSURANCE

SCHEDULE 4.12

UNRECORDED LIABILITIES

SCHEDULE 4.13.1(c)

SUMMIT LOAN OBLIGATION DOCUMENTATION

SCHEDULE 4.13.1(d)

OTHER COMMITMENTS

SCHEDULE 4.13.2

DEFAULTS UNDER SUMMIT AGREEMENTS, LIST OF SUMMIT’S AGREEMENTS

WHICH MAY BE TERMINATED OR NOT RENEWED

SCHEDULE 4.14

COLLECTIVE BARGAINING AGREEMENTS

AND OTHER EMPLOYEE MATTERS

SCHEDULE 4.15

LITIGATION

SCHEDULE 4.16

CONFLICTING INTERESTS

SCHEDULE 4.18

AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS

AFFECTING SUMMIT; GOVERNMENTAL CONSENT

SCHEDULE 4.19.3

TAX LIABILITIES

SCHEDULE 4.19.5

TAX RETURNS OF SUMMIT FOR TAXABLE YEARS

ENDED DECEMBER 27, 2003, DECEMBER 25, 2004, AND DECEMBER 30, 2005

SCHEDULE 4.20

ABSENCE OF CERTAIN ACTIONS

SCHEDULE 4.25

LOANS TO OFFICERS, DIRECTORS AND SHAREHOLDERS

SCHEDULE 5.1

RESTRICTIONS ON TRANSFER

SCHEDULE 9.3.2

SUMMIT BONUS EMPLOYEES

SCHEDULE 11.5.2(a)

ALLOCATION OF INSIDER SHAREHOLDER INDEMNIFICATION LIMITS

SCHEDULE 11.5.2(c)

ALLOCATION OF

HIXON, PRITCHARD AND CHANG INDEMNIFICATION LIMITS

EX-31.1

Exhibit 31.1

CERTIFICATION:

I, Daniel P. McCartney, certify that:

1. I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.;

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 periods 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)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly 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;

d) 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 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.

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 : October 25, 2006	/s/ Daniel P. McCartney
	Daniel P. McCartney
	Chief Executive Officer

EX-31.2

     Exhibit 31.2

I, James L. DiStefano, certify that:

1. I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.;

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 periods 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)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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;

d) 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 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.

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: October 25, 2006	/s/ James L. DiStefano
	James L. DiStefano
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Daniel P. McCartney, 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 Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and

2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company

/s/ Daniel P. McCartney

Daniel P. McCartney

Chief Executive Officer

October 25, 2006

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the ”Company”) on Form 10-Q for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, James L. DiStefano, 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 Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and

2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company

.

/s/ James L. DiStefano

James L. DiStefano

Chief Financial Officer

October 25, 2006