##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    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.
  Pennsylvania
    
    23-2018365(State or other jurisdiction of
    
    (IRS Employer Identificationincorporation or organization)
    
    number)
 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania
    
    19020(Address of principal executive office)
    
    (Zip code)
 215-639-4274
 þ o
  Large accelerated filer þ
    

Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



INDEX
 PAGE NO.PART I.  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of
September 30, 2008 and December 31, 2007
    
    
    2Consolidated Statements of Income for the Three
Months Ended Sept 30, 2008 and Sept 30, 2007
    
    
    3Consolidated Statements of Income for the Nine
Months Ended Sept 30, 2008 and Sept 30, 2007
    
    
    4Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2008 and September 30,
2007
    
    
    5Consolidated Statement of Stockholders Equity for
the Nine Months Ended September 30, 2008
    
    
    6Notes To Consolidated Financial Statements
    
    
    717Item 2. Managements Discussion and Analysis of Financial
Condition and Results Of Operations
    
    
    1834Item 3. Quantitative and Qualitative Disclosure About
Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35Part II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security
Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37EX-31.1EX-31.2EX-32.1EX-32.2
  - 1 -




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Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    93,572,000
    
    
    $
    92,461,000Accounts and notes receivable, less allowance for doubtful
accounts of $6,926,000 in 2008 and $4,284,000 in 2007
    
    
    94,689,000
    
    
    
    82,951,000Inventories and supplies
    
    
    15,998,000
    
    
    
    15,117,000Deferred income taxes
    
    
    1,479,000
    
    
    
    465,000Prepaid expenses and other
    
    
    4,253,000
    
    
    
    4,104,000Total current assets
    
    
    209,991,000
    
    
    
    195,098,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,698,000
    
    
    
    1,718,000Housekeeping equipment and office furniture
    
    
    16,836,000
    
    
    
    16,588,000Autos and trucks
    
    
    93,000
    
    
    
    103,00018,627,000
    
    
    
    18,409,000Less accumulated depreciation
    
    
    14,643,000
    
    
    
    14,106,0003,984,000
    
    
    
    4,303,000GOODWILL, Less accumulated amortization of $1,743,000 in 2008 and 2007
    
    
    15,020,000
    
    
    
    15,020,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of
$2,204,000 in 2008 and $1,409,000 in 2007
    
    
    5,298,000
    
    
    
    6,090,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    4,187,000
    
    
    
    6,058,000DEFERRED COMPENSATION FUNDING
    
    
    9,310,000
    
    
    
    10,361,000DEFERRED INCOME TAXES- long term portion
    
    
    6,711,000
    
    
    
    6,349,000OTHER NONCURRENT ASSETS
    
    
    89,000
    
    
    
    89,000TOTAL ASSETS
    
    $
    254,590,000
    
    
    $
    243,368,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    7,792,000
    
    
    $
    8,902,000Accrued payroll, accrued and withheld payroll taxes
    
    
    20,810,000
    
    
    
    11,613,000Other accrued expenses
    
    
    1,165,000
    
    
    
    1,338,000Income taxes payable
    
    
    1,109,000
    
    
    
    1,726,000Accrued insurance claims
    
    
    4,306,000
    
    
    
    4,302,000Total current liabilities
    
    
    35,182,000
    
    
    
    27,881,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    10,047,000
    
    
    
    10,037,000DEFERRED COMPENSATION LIABILITY
    
    
    9,589,000
    
    
    
    10,732,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
45,345,000 shares issued in 2008 and 44,715,000 in 2007
    
    
    453,000
    
    
    
    447,000Additional paid in capital
    
    
    82,914,000
    
    
    
    75,064,000Retained earnings
    
    
    137,364,000
    
    
    
    136,110,000Common stock in treasury, at cost, 2,338,000 shares in 2008 and
2,119,000 in 2007
    
    
    (20,959,000
    )
    
    
    (16,903,000
    )Total stockholders equity
    
    
    199,772,000
    
    
    
    194,718,000TOTAL LIABILITITIES AND STOCKHOLDERS EQUITY
    
    $
    254,590,000
    
    
    $
    243,368,000
  -2-




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Consolidated Statements of Income (Unaudited)
 For the Three Months Ended September 30,2008
    
    
    2007Revenues
    
    $
    152,978,000
    
    
    $
    146,669,000Operating costs and expenses:Costs of services provided
    
    
    134,228,000
    
    
    
    126,064,000Selling, general and administrative
    
    
    9,615,000
    
    
    
    9,865,000Other Income :Investment and interest
    
    
    (157,000
    )
    
    
    1,128,000Income before income taxes
    
    
    8,978,000
    
    
    
    11,868,000Income taxes
    
    
    3,456,000
    
    
    
    4,569,000Net Income
    
    $
    5,522,000
    
    
    $
    7,299,000Basic earnings per Common Share
    
    $
    0.13
    
    
    $
    0.17Diluted earnings per Common Share
    
    $
    0.13
    
    
    $
    0.17Cash dividends per Common Share
    
    $
    0.15
    
    
    $
    0.11Basic weighted average number of
Common Shares outstanding
    
    
    43,143,000
    
    
    
    42,606,000Diluted weighted average number of
Common Shares outstanding
    
    
    43,980,000
    
    
    
    43,969,000
  -3-




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##### Table of Contents



Consolidated Statements of Income
(Unaudited)
 For the Nine Months Ended September 30,2008
    
    

    2007Revenues
    
    $
    448,155,000
    
    
    $
    430,743,000Operating costs and expenses:Costs of services provided
    
    
    387,157,000
    
    
    
    367,480,000Selling, general and administrative
    
    
    30,318,000
    
    
    
    30,481,000Other Income :Investment and interest
    
    
    753,000
    
    
    
    3,436,000Income before income taxes
    
    
    31,433,000
    
    
    
    36,218,000Income taxes
    
    
    12,102,000
    
    
    
    13,944,000Net Income
    
    $
    19,331,000
    
    
    $
    22,274,000Basic earnings per Common Share
    
    $
    0.45
    
    
    $
    0.53Diluted earnings per Common Share
    
    $
    0.44
    
    
    $
    0.51Cash dividends per Common Share
    
    $
    0.42
    
    
    $
    0.30Basic weighted average number of
Common Shares outstanding
    
    
    43,078,000
    
    
    
    42,134,000Diluted weighted average number of
Common Shares outstanding
    
    
    44,050,000
    
    
    
    43,783,000
  -4-




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Consolidated Statements of Cash Flows
 (Unaudited)For the Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net Income
    
    $
    19,331,000
    
    
    $
    22,274,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    2,152,000
    
    
    
    2,249,000Bad debt provision
    
    
    3,050,000
    
    
    
    5,117,000Deferred income taxes benefits
    
    
    (1,376,000
    )
    
    
    (155,000
    )Stock-based compensation expense
    
    
    529,000
    
    
    
    305,000Unrealized loss (gain) on deferred compensation
fund investments
    
    
    1,212,000
    
    
    
    (790,000
    )Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (14,788,000
    )
    
    
    (17,366,000
    )Prepaid income taxes
    
    
    
    
    
    
    (2,304,000
    )Inventories and supplies
    
    
    (881,000
    )
    
    
    (1,936,000
    )Notes receivable- long term portion
    
    
    1,871,000
    
    
    
    1,814,000Deferred compensation funding
    
    
    (162,000
    )
    
    
    (1,128,000
    )Accounts payable and other accrued expenses
    
    
    (1,187,000
    )
    
    
    (1,222,000
    )Accrued payroll, accrued and withheld payroll taxes
    
    
    10,198,000
    
    
    
    8,041,000Accrued insurance claims
    
    
    14,000
    
    
    
    (635,000
    )Deferred compensation liability
    
    
    (773,000
    )
    
    
    1,296,000Income taxes payable
    
    
    (616,000
    )
    
    
    (274,000
    )Prepaid expenses and other assets
    
    
    (148,000
    )
    
    
    (315,000
    )Net cash provided by operating activities
    
    
    18,426,000
    
    
    
    14,971,000Cash flows from investing activities:Disposals of fixed assets
    
    
    6,000
    
    
    
    510,000Additions to property and equipment
    
    
    (1,046,000
    )
    
    
    (1,481,000
    )Cash paid for acquisition
    
    
    
    
    
    
    (364,000
    )Net cash used in investing activities
    
    
    (1,040,000
    )
    
    
    (1,335,000
    )Cash flows from financing activities:Treasury stock transactions in benefit plans
    
    
    
    
    
    
    238,000Dividends paid
    
    
    (18,077,000
    )
    
    
    (12,611,000
    )Reissuance of treasury stock pursuant to Dividend
Reinvestment Plan
    
    
    46,000
    
    
    
    44,000Acquisition of treasury stock
    
    
    (4,666,000
    )
    
    
    Proceeds from the exercise of stock options
    
    
    3,054,000
    
    
    
    5,335,000Tax benefit from equity compensation plans
    
    
    3,368,000
    
    
    
    6,406,000Net cash used in financing activities
    
    
    (16,275,000
    )
    
    
    (588,000
    )Net increase in cash and cash equivalents
    
    
    1,111,000
    
    
    
    13,048,000Cash and cash equivalents at beginning of the period
    
    
    92,461,000
    
    
    
    72,997,000Cash and cash equivalents at end of the period
    
    $
    93,572,000
    
    
    $
    86,045,000Supplementary Cash Flow Information:Income taxes cash payments, net of refunds
    
    $
    5,883,000
    
    
    $
    10,617,000Reclassification of deferred compensation obligation pursuant
to plan amendment
    
    $
    
    
    
    $
    3,572,000Issuance of 61,000 shares of Common Stock in 2008 and
65,000 shares of Common Stock in 2007 pursuant to
Employee Stock Plans
    
    $
    1,293,000
    
    
    $
    1,254,000
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For the Nine Months Ended September 30, 2008AdditionalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December 31, 2007
    
    
    44,715,000
    
    
    $
    447,000
    
    
    $
    75,064,000
    
    
    $
    136,110,000
    
    
    
    ($16,903,000
    )
    
    $
    194,718,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,331,000
    
    
    
    
    
    
    
    19,331,000Exercise of stock options and other stock-based compensation,
net of 2,000 shares tendered for payment
    
    
    630,000
    
    
    
    6,000
    
    
    
    3,048,000
    
    
    
    
    
    
    
    
    
    
    
    3,054,000Share-based compensation expense  stock options
    
    
    
    
    
    
    
    
    
    
    335,000
    
    
    
    
    
    
    
    
    
    
    
    335,000Tax benefit arising from Stock Plans transactions
    
    
    
    
    
    
    
    
    
    
    3,368,000
    
    
    
    
    
    
    
    
    
    
    
    3,368,000Purchase of common stock for treasury (296,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,666,000
    )
    
    
    (4,666,000
    )Treasury shares issued for Deferred Compensation Plan
funding and redemptions (12,000 shares)
    
    
    
    
    
    
    
    
    
    
    269,000
    
    
    
    
    
    
    
    101,000
    
    
    
    370,000Shares issued pursuant to Employee Stock Plans (61,000 shares)
    
    
    
    
    
    
    
    
    
    
    806,000
    
    
    
    
    
    
    
    487,000
    
    
    
    1,293,000Cash dividends  $.42 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,077,000
    )
    
    
    
    
    
    
    (18,077,000
    )Shares
issued pursuant to Dividend Reinvestment Plan (3,000 shares)
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    22,000
    
    
    
    46,000Balance, September 30, 2008
    
    
    45,345,000
    
    
    $
    453,000
    
    
    $
    82,914,000
    
    
    $
    137,364,000
    
    
    
    ($20,959,000
    )
    
    $
    199,772,000
  -6-




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1   Basis of Reporting
     Note 2   Three-For-Two Stock Split
  -7-




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Note 3   Goodwill and Other Intangible Assets
   Acquisition
    
    
    Amortization ExpenseAmount
    
    
    3rd Quarter
    
    
    Nine MonthsCustomer Relationships
    
    $
    6,700,000
    
    
    $
    240,000
    
    
    $
    720,000Non-compete Agreements
    
    
    800,000
    
    
    
    25,000
    
    
    
    75,000Total
    
    $
    7,500,000
    
    
    $
    265,000
    
    
    $
    795,000
  Customer
    
    Non-CompetePeriod/Year
    
    Relationships
    
    Agreements
    
    TotalOctober 1 to
December 31, 2008
    
    $
    240,000
    
    
    $
    25,000
    
    
    $
    265,0002009
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002010
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002011
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002012
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,000
  Summit
    
    All other
    
    Total$13,409,000
    
    $
    1,611,000
    
    
    $
    15,020,000
  Segment
    
    AmountFood
    
    $
    1,401,000Housekeeping
    
    
    13,619,000Total
    
    $
    15,020,000
 Note 4   Other Contingencies
 -8-




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Note 5   Segment Information
 Reportable Operating Segments
  -9-




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Housekeeping
    
    
    Food
    
    
    Corporate andservices
    
    
    services
    
    
    eliminations
    
    
    TotalQuarter Ended September 30,
2008Revenues
    
    $
    124,793,000
    
    
    $
    29,423,000
    
    
    $
    (1,238,000
    )
    
    $
    152,978,000Income before income
taxes
    
    $
    11,542,000
    
    
    $
    717,000
    
    
    $
    (3,281,000
    )(1)
    
    $
    8,978,000Quarter Ended September 30,
2007Revenues
    
    $
    119,360,000
    
    
    $
    28,360,000
    
    
    $
    (1,051,000
    )
    
    $
    146,669,000Income before income
taxes
    
    $
    11,466,000
    
    
    $
    503,000
    
    
    $
    (101,000
    )(1)
    
    $
    11,868,000Nine Months Ended
September 30, 2008Revenues
    
    $
    364,263,000
    
    
    $
    84,256,000
    
    
    $
    (364,000
    )
    
    $
    448,155,000Income before income
taxes
    
    $
    34,585,000
    
    
    $
    2,696,000
    
    
    $
    (5,848,000
    )(1)
    
    $
    31,433,000Nine Months Ended
September 30, 2007Revenues
    
    $
    347,698,000
    
    
    $
    82,087,000
    
    
    $
    958,000
    
    
    $
    430,743,000Income before income
taxes
    
    $
    34,105,000
    
    
    $
    2,455,000
    
    
    $
    (342,000
    )(1)
    
    $
    36,218,000
 
 (1)
    
    represents primarily corporate office cost and related overhead, as well as
consolidated subsidiaries operating expenses that are not allocated to the reportable
segments. Total Revenues from Clients
  -10-




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For the Quarter Ended September 30,2008
    
    
    2007Housekeeping services
    
    $
    85,048,000
    
    
    $
    82,294,000Laundry and linen services
    
    
    38,556,000
    
    
    
    35,714,000Food Services
    
    
    28,861,000
    
    
    
    28,169,000Maintenance services
and Other
    
    
    513,000
    
    
    
    492,000$
    152,978,000
    
    
    $
    146,669,000
 For the Nine Months Ended September 30,2008
    
    
    2007Housekeeping services
    
    $
    249,924,000
    
    
    $
    242,254,000Laundry and linen services
    
    
    112,763,000
    
    
    
    104,562,000Food Services
    
    
    83,870,000
    
    
    
    82,272,000Maintenance services
and Other
    
    
    1,598,000
    
    
    
    1,655,000$
    448,155,000
    
    
    $
    430,743,000
 Major Client
  2008
    
    2008Nine months
    
    3rd quarterTotal revenues
    
    
    15
    %
    
    
    14
    %Housekeeping
    
    
    14
    %
    
    
    14
    %Food
    
    
    18
    %
    
    
    16
    %
 2007
    
    2007Nine months
    
    3rd quarterTotal revenues
    
    
    16
    %
    
    
    16
    %Housekeeping
    
    
    15
    %
    
    
    15
    %Food
    
    
    22
    %
    
    
    21
    %
  Note 6   Earnings Per Common Share
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Quarter Ended September 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    5,522,000Basic earnings per
common share
    
    $
    5,522,000
    
    
    
    43,143,000
    
    
    $
    .13Effect of dilutive securities:Options
    
    
    
    
    
    
    837,000Diluted earnings per
common share
    
    $
    5,522,000
    
    
    
    43,980,000
    
    
    $
    .13
 Quarter Ended September 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,299,000Basic earnings per
common share
    
    $
    7,299,000
    
    
    
    42,606,000
    
    
    $
    .17Effect of dilutive securities:Options
    
    
    
    
    
    
    1,363,000
    
    
    
    .Diluted earnings per
common share
    
    $
    7,299,000
    
    
    
    43,969,000
    
    
    $
    .17
 Nine Months Ended September 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    19,331,000Basic earnings per
common share
    
    $
    19,331,000
    
    
    
    43,078,000
    
    
    $
    .45Effect of dilutive securities:Options
    
    
    
    
    
    
    972,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    19,331,000
    
    
    
    44,050,000
    
    
    $
    .44
 Nine Months Ended September 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    22,274,000Basic earnings per
common share
    
    $
    22,274,000
    
    
    
    42,134,000
    
    
    $
    .53Effect of dilutive securities:Options
    
    
    
    
    
    
    1,649,000
    
    
    
    (.02
    )Diluted earnings per
common share
    
    $
    22,274,000
    
    
    
    43,783,000
    
    
    $
    .51
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##### Table of Contents



Note 7  Dividends
  1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .13
    
    
    $
    .14
    
    
    $
    .15Total cash dividends paid
    
    $
    5,579,000
    
    
    $
    6,024,000
    
    
    $
    6,474,000Record date
    
    February 4
    
    
    April 25
    
    
    July 25Payment date
    
    February 15
    
    
    May 12
    
    
    August 8
  Note 8  Share-Based Compensation
 Stock Options
  Weighted AverageRemainingContractual
    
    
    AggregateWeighted Average
    
    
    Number
    
    
    Life
    
    
    IntrinsicExercise Price
    
    
    of Shares
    
    
    ( In Years)
    
    
    ValueOutstanding, January 1, 2008
    
    $
    6.34
    
    
    
    2,412,000Granted
    
    
    20.89
    
    
    
    372,000Cancelled
    
    
    9.62
    
    
    
    (32,000
    )Exercised
    
    
    4.88
    
    
    
    (633,000
    )Outstanding at September 30, 2008
    
    $
    9.28
    
    
    
    2,119,000
    
    
    
    4.80
    
    
    $
    20,050,000Options exercisable as of
September 30, 2008
    
    $
    6.85
    
    
    
    1,753,000
    
    
    
    3.87
    
    
    $
    9,092,000
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##### Table of Contents



Options Outstanding
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    AverageExercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrice Range
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$1.50 - 2.74
    
    435,000
    
    2.03
    
    $2.42
    
    435,000
    
    $2.423.01 - 5.53
    
    624,000
    
    4.77
    
    4.77
    
    624,000
    
    4.779.10 - 9.10
    
    340,000
    
    6.24
    
    9.10
    
    340,000
    
    9.1013.81 -13.81
    
    354,000
    
    2.27
    
    13.81
    
    354,000
    
    13.81$20.89 -20.89
    
    366,000
    
    9.26
    
    20.89
    

0
    
    2,119,000
    
    4.80
    
    $9.28
    
    1,753,000
    
    $6.85
  September
    
    September30, 2008
    
    30, 2007Weighted average grant-date fair value of stock options
granted:
    
    $
    2,237,000
    
    
    Not applicableTotal fair value of stock options vested:
    
    $
    -0-
    
    
    Not applicableTotal pre-tax intrinsic value of stock options exercised:
    
    $
    9,092,000
    
    
    $
    17,532,000
   Risk-free interest rate
    
    
    4.2
    %Expected volatility
    
    
    35.9
    %Weighted average expected life in years
    
    
    4.5Dividend yield
    
    
    2.0
    %
 -14-




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##### Table of Contents



Employee Stock Purchase Plan
  2008
    
    20073rd Quarter
    
    Nine Months
    
    3rd Quarter
    
    Nine Months$37,000
    
    $194,000
    
    $5,000
    
    $197,000
   20083rd Quarter
    
    Nine MonthsRisk-free interest rate
    
    
    3.6
    %
    
    
    3.6
    %Expected volatility
    
    
    38.8
    %
    
    
    38.8
    %Weighted average expected life (in years)
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    2.0
    %
    
    
    2.0
    %
 20073rd Quarter
    
    Nine MonthsRisk-free interest rate
    
    
    3.8
    %
    
    
    3.8
    %Expected volatility
    
    
    36.0
    %
    
    
    36.0
    %Weighted average expected life (in years)
    
    
    .25
    
    
    
    .25Dividend yield
    
    
    2.1
    %
    
    
    2.1
    %
  Note 9  Related Party Transactions
  -15-




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Note 10- Cumulative Effect of Adjustment to Deferred Compensation Liability
  Note 11- Income Taxes
    -16-




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##### Table of Contents



Note 12  Recently Issued Accounting Pronouncements
  -17-




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##### Table of Contents



ITEM 2    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Statement Regarding Forward Looking Statements
   -18-




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##### Table of Contents



RESULTS OF OPERATIONS
  Overview
       Consolidated Operations
 -19-




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##### Table of Contents



Relation to Consolidated RevenuesFor the Quarter Ended Sept 30,
    
    For the Nine Months Ended Sept 30,2008
    
    2007
    
    2008
    
    2007Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    87.7
    
    
    
    86.0
    
    
    
    86.4
    
    
    
    85.3Selling, general and
administration
    
    
    6.3
    
    
    
    6.7
    
    
    
    6.8
    
    
    
    7.1Investment and interest income
    
    
    (.1
    )
    
    
    .8
    
    
    
    .2
    
    
    
    .8Income before income taxes
    
    
    5.9
    
    
    
    8.1
    
    
    
    7.0
    
    
    
    8.4Income taxes
    
    
    2.3
    
    
    
    3.1
    
    
    
    2.7
    
    
    
    3.2Net income
    
    
    3.6
    %
    
    
    5.0
    %
    
    
    4.3
    %
    
    
    5.2
    %
    2008 Third Quarter Compared with 2007 Third Quarter
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    152,978,000
    
    
    
    4.3
    %
    
    $
    (1,238,000
    )
    
    $
    124,793,000
    
    
    
    4.6
    %
    
    $
    29,423,000
    
    
    
    3.7
    %Cost of services provided
    
    
    134,228,000
    
    
    
    6.5
    
    
    
    (7,729,000
    )
    
    
    113,251,000
    
    
    
    5.0
    
    
    
    28,706,000
    
    
    
    3.0Selling, general and
administrative expense
    
    
    9,615,000
    
    
    
    (2.5
    )
    
    
    9,615,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    (157,000
    )
    
    
    (113.9
    )
    
    
    (157,000
    )
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    8,978,000
    
    
    
    (24.4
    )%
    
    
    (3,281,000
    )
    
    $
    11,542,000
    
    
    
    .7
    %
    
    $
    717,000
    
    
    
    42.6
    %
 Revenues
 Consolidated
  -20-




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##### Table of Contents



Reportable Segments
    Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    (Decr) %Bad debt provision
    
    
    1.4
    
    
    
    1.6
    
    
    
    (.2
    )Workers compensation and general
liability insurance
    
    
    3.9
    
    
    
    3.2
    
    
    
    .7
    Reportable Segments
  -21-




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##### Table of Contents



Cost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.6
    
    
    
    81.4
    
    
    
    .2Housekeeping supplies
    
    
    6.0
    
    
    
    4.9
    
    
    
    1.1Food labor and other labor costs
    
    
    53.3
    
    
    
    55.2
    
    
    
    (1.9
    )Food supplies
    
    
    40.2
    
    
    
    39.2
    
    
    
    1.0
   Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
  -22-




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##### Table of Contents



Consolidated Income Taxes
  Consolidated Net Income
  2008 Nine Month Period Compared with 2007 Nine Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    448,155,000
    
    
    
    4.0
    %
    
    $
    (364,000
    )
    
    $
    364,263,000
    
    
    
    4.8
    %
    
    $
    84,256,000
    
    
    
    2.6
    %Cost of services provided
    
    
    387,157,000
    
    
    
    5.4
    
    
    
    (24,081,000
    )
    
    
    329,678,000
    
    
    
    5.1
    
    
    
    81,560,000
    
    
    
    2.4Selling, general and
administrative expense
    
    
    30,318,000
    
    
    
    (.5
    )
    
    
    30,318,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    753,000
    
    
    
    (78.1
    )
    
    
    753,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    31,433,000
    
    
    
    (13.2
    )%
    
    
    (5,848,000
    )
    
    $
    34,585,000
    
    
    
    1.4
    %
    
    $
    2,696,000
    
    
    
    9.8
    %
 Revenues
 Consolidated
   -23-




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##### Table of Contents



Reportable Segments
    Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    (Decr) %Bad debt provision
    
    
    .7
    
    
    
    1.2
    
    
    
    (.5
    )Workers compensation and general
liability insurance
    
    
    3.4
    
    
    
    3.2
    
    
    
    .2
    Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.4
    
    
    
    81.4
    
    
    
    Housekeeping supplies
    
    
    6.1
    
    
    
    5.1
    
    
    
    1.0Food labor and other labor costs
    
    
    53.3
    
    
    
    54.8
    
    
    
    (1.5
    )Food supplies
    
    
    39.8
    
    
    
    38.3
    
    
    
    1.5
  -24-




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##### Table of Contents



Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -25-




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-26-




---



##### Table of Contents



Critical Accounting Policies and Estimates
    Allowance for Doubtful Accounts
    -27-




---



##### Table of Contents



Aggregate AccountBalances of Clientsin Bankruptcy orPeriod
    
    In/Pending
    
    Net Write-Offs
    
    Bad Debt
    
    Allowance forEnded
    
    Collection/Litigation
    
    of Client Accounts
    
    Provision
    
    Doubtful AccountsSeptember
30, 2008
    
    $
    10,620,000
    
    
    $
    408,000
    
    
    $
    3,050,000
    
    
    $
    6,926,000December
31, 2007
    
    $
    9,363,000
    
    
    $
    4,574,000
    
    
    $
    6,142,000
    
    
    $
    4,284,000
   Accrued Insurance Claims
  -28-




---



##### Table of Contents



Asset Valuations and Review for Potential Impairment
  -29-




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
    Investing Activities
  Financing Activities
  -30-




---



##### Table of Contents



1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .13
    
    
    $
    .14
    
    
    $
    .15Total cash dividends paid
    
    $
    5,579,000
    
    
    $
    6,024,000
    
    
    $
    6,474,000Record date
    
    February 4
    
    
    April 25
    
    
    July 25Payment date
    
    February 15
    
    
    May 12
    
    
    August 8
    Reclassification of Deferred Compensation Plan Obligation
  Line of Credit
   -31-




---



##### Table of Contents



Covenant Description and Requirement
    
    Status at September 30, 2008Commitment coverage ratio: cash and cash
equivalents must equal or exceed outstanding
obligations under the line by a multiple of 2.
    
    Commitment coverage is 3.5Tangible net worth: must exceed $146,000,000.
    
    Tangible net worth is $179,454,000
  Accounts and Notes Receivable
   -32-




---



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Insurance Programs
     -33-




---



##### Table of Contents



Capital Expenditures
  Material Off-Balance Sheet Arrangements
  Effects of Inflation
  -34-




---



##### Table of Contents



ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Certifications
  -35-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1 Legal Proceedings
 
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Repurchases
 (a)
    
    (b)
    
    (c)
    
    (d)Total number of
    
    Maximumshares purchased as
    
    number of sharespart of publicly
    
    that may yet beTotal number of
    
    Average price
    
    announced plans
    
    purchased under the2008 Period
    
    Shares purchased
    
    paid per share
    
    or programs
    
    plans or programsJuly 1 to
July 31
    
    
    8,000
    
    
    $
    14.51
    
    
    
    8,000
    
    
    
    1,132,000August 1 to
August 31
    
    noneSeptember 1 to
September 30
    
    none
 
 ITEM 3 Defaults under Senior Securities.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders
 
 ITEM 5. Other Information.
  
 ITEM 6. Exhibits
      -36-




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##### Table of Contents



SIGNATURES
  HEALTHCARE
SERVICES GROUP, INC.October 17, 2008
    
    /s/ Daniel P. McCartneyDate
    
    DANIEL P. McCARTNEY, ChiefExecutive OfficerOctober 17, 2008
    
    /s/ Richard W. HudsonDate
    
    RICHARD W. HUDSON, ChiefFinancial Officer and Secretary
 -37-