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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 ofincorporation or organization) |  | 23-2018365(IRS Employer Identificationnumber) | 
| | ------------------------------------------------------------------------- |  | --------------------------------------------- | 

| | 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.

YesNo

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). YESNO

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.






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**INDEX**




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




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PART
                  I. FINANCIAL INFORMATIONItem
                  1. FINANCIAL STATEMENTS**Consolidated
            Balance Sheets**
  **(Unaudited)**
            **September
              30,**
            **2006**
          
          **December
              31,**
            **2005**ASSETSCURRENT
              ASSETS:Cash
              and cash equivalents
          
          $
          76,399,000
          
          $
          91,005,000Accounts
              and notes receivable, less allowance for doubtfulaccounts
              of $3,403,000 in 2006 and $2,275,000 in 2005
          
          
          77,274,000
          
          
          59,197,000Inventories
              and supplies
          
          
          12,421,000
          
          
          11,729,000Deferred
              income taxes
          
          
          818,000
          
          
          355,000Prepaid
              expenses and other
          
          
          4,026,000
          
          
          3,330,000Total
              current assets
          
          
          170,938,000
          
          
          165,616,000PROPERTY
              AND EQUIPMENT:Laundry
              and linen equipment installations
          
          
          1,785,000
          
          
          2,416,000Housekeeping
              and office equipment
          
          
          17,834,000
          
          
          15,141,000Autos
              and trucks
          
          
          79,000
          
          
          79,00019,698,000
          
          
          17,636,000Less
              accumulated depreciation
          
          
          14,643,000
          
          
          12,892,0005,055,000
          
          
          4,744,000GOODWILL
              AND OTHER INTANGIBLE ASSETS- Less accumulated amortization of $1,743,000
              in 2006 and 2005
          
          
          19,341,000
          
          
          1,612,000NOTES
              RECEIVABLE- long term portion, net of discount
          
          
          4,856,000
          
          
          4,555,000DEFERRED
              COMPENSATION FUNDING
          
          
          6,704,000
          
          
          5,626,000DEFERRED
              INCOME TAXES- long term portion
          
          
          7,166,000
          
          
          6,181,000OTHER
              NONCURRENT ASSETS
          
          
          104,000
          
          
          96,000TOTAL
              ASSETS
          
          $
          214,164,000
          
          $
          188,430,000LIABILITIES
                  AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:Accounts
              payable
          
          $
          10,304,000
          
          $
          8,760,000Accrued
              payroll, accrued and withheld payroll taxes
          
          
          15,282,000
          
          
          7,792,000Other
              accrued expenses
          
          
          1,799,000
          
          
          657,000Income
              taxes payable
          
          
          276,000
          
          
          1,467,000Accrued
              insurance claims
          
          
          4,809,000
          
          
          4,405,000Total
              current liabilities
          
          
          32,470,000
          
          
          23,081,000ACCRUED
              INSURANCE CLAIMS- long term portion
          
          
          11,220,000
          
          
          10,277,000DEFERRED
              COMPENSATION LIABILITY
          
          
          8,604,000
          
          
          6,909,000COMMITMENTS
              AND CONTINGENCIESSTOCKHOLDERS'
              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
          
          
          287,000Additional
              paid in capital
          
          
          57,561,000
          
          
          48,603,000Retained
              earnings
          
          
          121,818,000
          
          
          112,299,000Common
              stock in treasury, at cost, 1,515,000 shares in 2006 and1,616,000
              in 2005
          
          
          (17,798,000
          )
          
          (13,026,000
          )Total
              stockholders equity
          
          
          161,870,000
          
          
          148,163,000TOTAL
              LIABILITITIES AND STOCKHOLDERS EQUITY
          
          $
          214,164,000
          
          $
          188,430,000




See
        accompanying notes.


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




See
        accompanying notes.


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




See
        accompanying notes.


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**September
                    30,****2006**
                
                **2005**Cash
                    flows from operating activities:Net
                    Income
                
                $
                18,557,000
                
                $
                13,620,000Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                
                
                1,408,000
                
                
                1,400,000Bad
                    debt provision
                
                
                725,000
                
                
                875,000Deferred
                    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
                )
                
                1,472,000Deferred
                    compensation funding
                
                
                (534,000
                )
                
                (593,000
                )Accounts
                    payable and other accrued expenses
                
                
                (755,000
                )
                
                1,263,000Accrued
                    payroll, accrued and withheld payroll taxes
                
                
                7,048,000
                
                
                7,203,000Accrued
                    insurance claims
                
                
                953,000
                
                
                561,000Deferred
                    compensation liability
                
                
                1,694,000
                
                
                1,358,000Income
                    taxes payable
                
                
                (894,000
                )
                
                136,000Prepaid
                    expenses and other assets
                
                
                (109,000
                )
                
                (582,000
                )Net
                    cash provided by operating activities
                
                
                16,666,000
                
                
                20,721,000Cash
                    flows from investing activities:Disposals
                    of fixed assets
                
                
                122,000
                
                
                40,000Cash
                    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 DividendReinvestment
                    Plan
                
                
                31,000
                
                
                24,000Proceeds
                    from the exercise of stock options
                
                
                2,296,000
                
                
                4,278,000Tax
                    benefit of stock option transactions
                
                
                1,007,000
                
                
                2,920,000Net
                    cash used in financing activities
                
                
                (20,258,000
                )
                
                (2,450,000
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                (14,606,000
                )
                
                16,856,000Cash
                    and cash equivalents at beginning of the period
                
                
                91,005,000
                
                
                74,847,000Cash
                    and cash equivalents at end of the period
                
                $
                76,399,000
                
                $
                91,703,000Supplementary
                    Cash Flow Information:Income
                    taxes cash payments, net of refunds
                
                $
                11,966,000
                
                $
                4,908,000Issuance
                    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.


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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
        )
        $
        148,163,000Net
            income for the period
        
        
        
        
        
        
        
        
        
        
        
        18,557,000
        
        
        
        
        
        18,557,000Exercise
            of stock options and other share-based compensation, net of 3,000
            shares tendered for payment
        
        
        254,000
        
        
        2,000
        
        
        2,294,000
        
        
        
        
        
        
        
        
        2,296,000Tax
            benefit arising from stock option transactions
        
        
        
        
        
        
        
        
        1,007,000
        
        
        
        
        
        
        
        
        1,007,000Acquisition
            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
        
        
        8,517,000Shares
            purchased and shares sold in employee DeferredCompensation
            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
        
        
        728,000Cash
            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
        
        
        31,000Balance,
            September 30, 2006
        
        
        28,931,000
        
        $
        289,000
        
        $
        57,561,000
        
        $
        121,818,000
        
        
        ($17,798,000
        )
        $
        161,870,000




See
      accompanying notes.


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**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 the ****** United
      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 period ****** ended
      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.


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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
        
        $
        10,441,000Other
            assets
        
        
        742,000Fixed
            assets and inventory
        
        
        452,000Goodwill
            and Other Intangible Assets
        
        
        17,728,000Total
            assets acquired
        
        
        29,363,000Accounts
            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.


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**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.


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**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, 2006Revenues
              
              $
              105,053,000
              
              $
              26,403,000
              
              $
              (
                  1,373,000
              )
              $
              130,083,000Income
                  before income taxes
              
              $
              9,282,000
              
              $
              795,000
              
              $
              342,000
              (1)
              $
              10,419,000Quarter
                  Ended Sept 30, 2005Revenues
              
              $
              95,155,000
              
              $
              23,772,000
              
              $
              (
                  1,243,000
              )
              $
              117,684,000Income
                  before income taxes
              
              $
              7,738,000
              
              $
              477,000
              
              $
              (
                  516,000
              )(1)
              $
              7,699,000Nine
                  Months Ended Sept 30, 2006Revenues
              
              $
              298,203,000
              
              $
              74,115,000
              
              $
              (
                  477,000
              )
              $
              371,841,000Income
                  before income taxes
              
              $
              28,133,000
              
              $
              2,411,000
              
              $
              (
                  1,087,000
              )(1)
              $
              29,457,000Nine
                  Months Ended Sept 30, 2005Revenues
              
              $
              279,519,000
              
              $
              69,310,000
              
              $
              (
                  403,000
              )
              $
              348,426,000Income
                  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.


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**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
                
                $
                66,291,000Laundry
                    and linen services
                
                
                29,382,000
                
                
                27,588,000Food
                    Services
                
                
                25,727,000
                
                
                23,245,000Maintenance
                    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
              
              $
              196,235,000Laundry
                  and linen services
              
              
              86,353,000
              
              
              82,047,000Food
                  Services
              
              
              72,937,000
              
              
              68,312,000Maintenance
                  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.


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**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
              
              $
              6,564,000Basic
                  earnings per common share
              
              $
              6,564,000
              
              
              27,460,000
              
              $
              .24Effect
                  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
                  
                  $
                  4,774,000Basic
                      earnings per common share
                  
                  $
                  4,774,000
                  
                  
                  27,079,000
                  
                  $
                  .18Effect
                      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
              
              $
              18,557,000Basic
                  earnings per common share
              
              $
              18,557,000
              
              
              27,399,000
              
              $
              .68Effect
                  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-shareAmount**Net
                  income
              
              $
              13,620,000Basic
                  earnings per common share
              
              $
              13,620,000
              
              
              26,861,000
              
              $
              .51Effect
                  of dilutive securities:Options
              
              
              
              
              
              1,425,000
              
              
              (.03
              )Diluted
                  earnings per common share
              
              $
              13,620,000
              
              
              28,286,000
              
              $
              .48





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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
              
              $
              .12Total
                  cash dividends paid
              
              $
              2,730,000
              
              $
              3,015,000
              
              $
              3,293,000Record
                  date
              
              
              February
                  3
              
              
              April
                  28
              
              
              July
                  28Payment
                  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 ended ****** September
      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
              
              
              2,843,000Granted
              
              
              —
              
              
              —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****ExercisePrice 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
              
              
              20.712,557,000
              
              
              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
                  applicableTotal
                  pre-tax fair value of stock options vested:
              
              
              Not
                  applicable
              
              $
              2,294,000Total
                  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)
            
            
            .25Dividend
                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
                  IncomeAs
                  reported
              
              $
              4,774,000
              
              $
              13,620,000Deduct:
                  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
              
              $
              11,468,000Basic
                  Earnings Per Common ShareAs
                  reported
              
              $
              .18
              
              $
              .51Pro
                  forma
              
              $
              .17
              
              $
              .43Diluted
                  Earnings Per Common ShareAs
                  reported
              
              $
              .17
              
              $
              .48Pro
                  forma
              
              $
              .16
              
              $
              .41




(1)
            Represents
                actual 2005 share-based compensation applicable to the ESPP allocated
                to
                thethree
                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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**I****TEM
      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 period ****** ended
      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

        

        

        87.3Selling,
                  general andadministration

        

        

        6.7

        

        

        6.8

        

        

        6.9

        

        

        7.0Investment
                  and interest income

        

        

        1.0

        

        

        .8

        

        

        .9

        

        

        .6Income
                  before income taxes

        

        

        8.0

        

        

        6.6

        

        

        7.9

        

        

        6.3Income
                  taxes

        

        

        3.0

        

        

        2.5

        

        

        2.9

        

        

        2.4Net
                  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, 2006 ****** percentages
      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

        

        

        9.9Selling,
                  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
              
              
              6.4Selling,
                  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 generalliability
                  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

        

        

        .2Food
                  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, 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 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.


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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.


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**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.


**1****st****Quarter**

          

          **2****nd****Quarter**

          

          **3****rd****Quarter**Cash
                    dividend per common share

          

          $

          .10

          

          $

          .11

          

          $

          .12Total
                    cash dividends paid

          

          $

          2,730,000

          

          $

          3,015,000

          

          $

          3,293,000Record
                    date

          

          

          February
                    3

          

          

          April
                    28

          

          

          July
                    28Payment
                    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
                  outstandingobligations
                  under the line by a multiple of 2.
              
              Commitment
                  coverage is 3.1Tangible
                  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.


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**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.


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**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
        
        
        noneAug
            1 to Aug 31
        
        
        noneSept
            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


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**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. McCartneyDate
              
              
              DANIEL
                  P. McCARTNEY, Chief
                  Executive
                    Officer





October
                  25, 2006
              
              
              /s/ Thomas
                  A. CookDate
              
              
              THOMAS
                  A. COOK, President and
                  Chief
                    Operating Officer
 
 October
                  25, 2006
              
              
              /s/ James
                  L. DiStefanoDate
              
              
              JAMES
                  L. DiSTEFANO, Chief Financial
                  Officer
                    and Treasurer
  October
                  25, 2006
              
              
              /s/ Richard
                  W. HudsonDate
              
              
              RICHARD
                  W. HUDSON, Vice
                  President-Finance,
                    Secretary and Chief
                  Accounting
                    Officer


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