##### 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 June 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 
incorporation or organization)
    
    (IRS Employer Identification
number)
 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania 19020
 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
 PART I.
    
    FINANCIAL INFORMATION
    
    PAGE NO.Item 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2008
and  December 31, 2007
    
    2Consolidated Statements of Income for the Three Months Ended June 30, 2008 and June 30, 2007
    
    3Consolidated Statements of  Income for the Six Months Ended June 30, 2008 and June 30, 2007
    
    4Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and June 30, 2007
    
    5Consolidated Statement of Stockholders Equity for the Six Months Ended June 30, 2008
    
    6Notes To Consolidated Financial Statements
    
    7  17Item 2.
    
    Managements  Discussion and Analysis of Financial Condition and Results Of Operations
    
    18  33Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    34Item 4.
    
    Controls and Procedures
    
    34Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    35Item 1A.
    
    Risk Factors
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    35Item 5.
    
    Other Information
    
    36Item 6.
    
    Exhibits
    
    36Signatures
    
    37Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive Officer pursuant to Section 906Certification of Principal Financial Officer pursuant to Section 906
  -1-




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##### Table of Contents



Consolidated
Balance Sheets
 (Unaudited)June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    90,747,000
    
    
    $
    92,461,000Accounts and notes receivable, less allowance for doubtful
accounts of $5,131,000 in 2008 and $4,284,000 in 2007
    
    
    87,548,000
    
    
    
    82,951,000Inventories and supplies
    
    
    15,406,000
    
    
    
    15,117,000Deferred income taxes
    
    
    467,000
    
    
    
    465,000Prepaid expenses and other
    
    
    5,238,000
    
    
    
    4,104,000Total current assets
    
    
    199,406,000
    
    
    
    195,098,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,695,000
    
    
    
    1,718,000Housekeeping equipment and office furniture
    
    
    16,459,000
    
    
    
    16,588,000Autos and trucks
    
    
    103,000
    
    
    
    103,00018,257,000
    
    
    
    18,409,000Less accumulated depreciation
    
    
    14,271,000
    
    
    
    14,106,0003,986,000
    
    
    
    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
$1,938,000 in 2008 and $1,409,000 in 2007
    
    
    5,562,000
    
    
    
    6,090,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    5,577,000
    
    
    
    6,058,000DEFERRED COMPENSATION FUNDING
    
    
    9,735,000
    
    
    
    10,361,000DEFERRED INCOME TAXES- long term portion
    
    
    6,301,000
    
    
    
    6,349,000OTHER NONCURRENT ASSETS
    
    
    90,000
    
    
    
    89,000TOTAL ASSETS
    
    $
    245,677,000
    
    
    $
    243,368,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,418,000
    
    
    $
    8,902,000Accrued payroll, accrued and withheld payroll taxes
    
    
    11,952,000
    
    
    
    11,613,000Other accrued expenses
    
    
    535,000
    
    
    
    1,338,000Income taxes payable
    
    
    1,307,000
    
    
    
    1,726,000Accrued insurance claims
    
    
    4,111,000
    
    
    
    4,302,000Total current liabilities
    
    
    26,323,000
    
    
    
    27,881,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    9,593,000
    
    
    
    10,037,000DEFERRED COMPENSATION LIABILITY
    
    
    9,926,000
    
    
    
    10,732,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
45,268,000 shares issued in 2008 and 44,715,000 in 2007
    
    
    453,000
    
    
    
    447,000Additional paid in capital
    
    
    81,920,000
    
    
    
    75,064,000Retained earnings
    
    
    138,317,000
    
    
    
    136,110,000Common stock in treasury, at cost, 2,332,000 shares in 2008 and
2,119,000 in 2007
    
    
    (20,855,000
    )
    
    
    (16,903,000
    )Total stockholders equity
    
    
    199,835,000
    
    
    
    194,718,000TOTAL LIABILITITIES AND STOCKHOLDERS EQUITY
    
    $
    245,677,000
    
    
    $
    243,368,000
  -2-




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Consolidated Statements of Income(Unaudited)For the Three Months Ended June 30,2008
    
    
    2007Revenues
    
    $
    147,918,000
    
    
    $
    142,907,000Operating costs and expenses:Costs of services provided
    
    
    127,074,000
    
    
    
    121,615,000Selling, general and
administrative
    
    
    10,124,000
    
    
    
    10,105,000Other Income:Investment and interest
    
    
    585,000
    
    
    
    1,047,000Income before income taxes
    
    
    11,305,000
    
    
    
    12,234,000Income taxes
    
    
    4,352,000
    
    
    
    4,710,000Net Income
    
    $
    6,953,000
    
    
    $
    7,524,000Basic earnings per Common Share
    
    $
    0.16
    
    
    $
    0.18Diluted earnings per Common
Share
    
    $
    0.16
    
    
    $
    0.17Cash dividends per Common Share
    
    $
    0.14
    
    
    $
    0.10Basic weighted average number of
Common Shares outstanding
    
    
    43,080,000
    
    
    
    42,131,000Diluted weighted average number
of
Common Shares outstanding
    
    
    43,962,000
    
    
    
    43,710,000
  -3-




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Consolidated Statements of Income(Unaudited)For the Six Months Ended June 30,2008
    
    
    2007Revenues
    
    $
    295,177,000
    
    
    $
    284,074,000Operating costs and expenses:Costs of services provided
    
    
    252,928,000
    
    
    
    241,416,000Selling, general and
administrative
    
    
    20,703,000
    
    
    
    20,616,000Other Income:Investment and interest
    
    
    909,000
    
    
    
    2,307,000Income before income taxes
    
    
    22,455,000
    
    
    
    24,349,000Income taxes
    
    
    8,645,000
    
    
    
    9,375,000Net Income
    
    $
    13,810,000
    
    
    $
    14,974,000Basic earnings per Common Share
    
    $
    0.32
    
    
    $
    0.36Diluted earnings per Common Share
    
    $
    0.31
    
    
    $
    0.34Cash dividends per Common Share
    
    $
    0.27
    
    
    $
    0.19Basic weighted average number of
Common Shares outstanding
    
    
    43,048,000
    
    
    
    41,895,000Diluted weighted average number
of
Common Shares outstanding
    
    
    44,088,000
    
    
    
    43,688,000
  -4-




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Consolidated Statements of Cash Flows
    
    (Unaudited)For the Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net Income
    
    $
    13,810,000
    
    
    $
    14,974,000Adjustments to reconcile net income
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,494,000
    
    
    
    1,536,000Bad debt provision
    
    
    850,000
    
    
    
    2,827,000Deferred income taxes benefits
    
    
    46,000
    
    
    
    (1,752,000
    )Stock-based compensation expense
    
    
    381,000
    
    
    
    202,000Unrealized loss (gain) on deferred compensation
fund investments
    
    
    491,000
    
    
    
    (620,000
    )Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (5,446,000
    )
    
    
    (9,064,000
    )Prepaid income taxes
    
    
    
    
    
    
    (4,174,000
    )Inventories and supplies
    
    
    (290,000
    )
    
    
    (883,000
    )Notes receivable long term portion
    
    
    480,000
    
    
    
    286,000Deferred compensation funding
    
    
    134,000
    
    
    
    (736,000
    )Accounts payable and other accrued expenses
    
    
    (1,154,000
    )
    
    
    (3,173,000
    )Accrued payroll, accrued and withheld payroll taxes
    
    
    1,340,000
    
    
    
    (410,000
    )Accrued insurance claims
    
    
    (634,000
    )
    
    
    855,000Deferred compensation liability
    
    
    (435,000
    )
    
    
    727,000Income taxes payable
    
    
    (418,000
    )
    
    
    (274,000
    )Prepaid expenses and other assets
    
    
    (1,135,000
    )
    
    
    (901,000
    )Net cash provided by (used in) operating activities
    
    
    9,514,000
    
    
    
    (580,000
    )Cash flows from investing activities:Disposals of fixed assets
    
    
    82,000
    
    
    
    109,000Additions to property and equipment
    
    
    (729,000
    )
    
    
    (726,000
    )Cash paid for acquisition
    
    
    
    
    
    
    (20,000
    )Net cash used in investing activities
    
    
    (647,000
    )
    
    
    (637,000
    )Cash flows from financing activities:Treasury stock transactions in benefit plans
    
    
    
    
    
    
    436,000Dividends paid
    
    
    (11,603,000
    )
    
    
    (8,072,000
    )Reissuance of treasury stock pursuant to Dividend
Reinvestment Plan
    
    
    31,000
    
    
    
    29,000Acquisition of treasury stock
    
    
    (4,551,000
    )
    
    
    Proceeds from the exercise of stock options
    
    
    2,407,000
    
    
    
    4,210,000Tax benefit from equity compensation plans
    
    
    3,135,000
    
    
    
    5,067,000Net cash provided by (used in) financing activities
    
    
    (10,581,000
    )
    
    
    1,670,000Net increase (decrease) in cash and cash equivalents
    
    
    (1,714,000
    )
    
    
    453,000Cash and cash equivalents at beginning of the period
    
    
    92,461,000
    
    
    
    72,997,000Cash and cash equivalents at end of the period
    
    $
    90,747,000
    
    
    $
    73,450,000Supplementary Cash Flow Information:Income taxes cash payments, net of refunds
    
    $
    5,883,000
    
    
    $
    10,508,000Reclassification of deferred compensation obligation pursuant
to plan amendment
    
    $
    
    
    
    $
    3,426,000Issuance 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
  -5-




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##### Table of Contents



(Unaudited)
    
    For the Six Months Ended June 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,810,000
    
    
    
    
    
    
    
    13,810,000Exercise of stock options and other stock-based compensation,
net of 2,000 shares tendered for payment
    
    
    553,000
    
    
    
    6,000
    
    
    
    2,401,000
    
    
    
    
    
    
    
    
    
    
    
    2,407,000Share-based compensation expense  stock options
    
    
    
    
    
    
    
    
    
    
    224,000
    
    
    
    
    
    
    
    
    
    
    
    224,000Tax benefit arising from Stock Plans transactions
    
    
    
    
    
    
    
    
    
    
    3,135,000
    
    
    
    
    
    
    
    
    
    
    
    3,135,000Purchase of common stock for treasury (288,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,551,000
    )
    
    
    (4,551,000
    )Treasury shares issued for Deferred Compensation Plan
funding and redemptions (12,000 shares)
    
    
    
    
    
    
    
    
    
    
    273,000
    
    
    
    
    
    
    
    98,000
    
    
    
    371,000Shares issued pursuant to Employee Stock Plans (61,000 shares)
    
    
    
    
    
    
    
    
    
    
    806,000
    
    
    
    
    
    
    
    487,000
    
    
    
    1,293,000Cash dividends  $.27 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,603,000
    )
    
    
    
    
    
    
    (11,603,000
    )Shares issued pursuant to Dividend Reinvestment Plan (2,000 shares)
    
    
    
    
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    14,000
    
    
    
    31,000Balance, June 30, 2008
    
    
    45,268,000
    
    
    $
    453,000
    
    
    $
    81,920,000
    
    
    $
    138,317,000
    
    
    
    ($20,855,000
    )
    
    $
    199,835,000
  -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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##### Table of Contents



Note 3   Goodwill and Other Intangible Assets
   Acquisition
    
    
    Amortization ExpenseAmount
    
    
    2nd Quarter
    
    
    Six MonthsCustomer Relationships
    
    $
    6,700,000
    
    
    $
    240,000
    
    
    $
    479,000Non-compete Agreements
    
    
    800,000
    
    
    
    25,000
    
    
    
    50,000Total
    
    $
    7,500,000
    
    
    $
    265,000
    
    
    $
    529,000
  Customer
    
    Non-CompetePeriod/Year
    
    Relationships
    
    Agreements
    
    TotalJuly 1 to
December 31, 2008
    
    $
    479,000
    
    
    $
    50,000
    
    
    $
    529,0002009
    
    $
    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
 -8-




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Note 4   Other Contingencies
       Note 5   Segment Information
 -9-




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##### Table of Contents



Reportable Operating Segments
    Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalQuarter Ended June 30,
2008Revenues
    
    $
    119,952,000
    
    
    $
    27,592,000
    
    
    $
    374,000
    
    
    $
    147,918,000Income before income
taxes
    
    $
    11,227,000
    
    
    $
    701,000
    
    
    $
    (623,000
    )(1)
    
    $
    11,305,000Quarter Ended June 30,
2007Revenues
    
    $
    115,137,000
    
    
    $
    27,174,000
    
    
    $
    596,000
    
    
    $
    142,907,000Income before income
taxes
    
    $
    11,319,000
    
    
    $
    772,000
    
    
    $
    143,000
    (1)
    
    $
    12,234,000Six Months Ended June 30,
2008Revenues
    
    $
    239,470,000
    
    
    $
    54,833,000
    
    
    $
    874,000
    
    
    $
    295,177,000Income before income
taxes
    
    $
    23,043,000
    
    
    $
    1,979,000
    
    
    $
    (2,567,000
    )(1)
    
    $
    22,455,000Six Months Ended June 30,
2007Revenues
    
    $
    228,339,000
    
    
    $
    53,726,000
    
    
    $
    2,009,000
    
    
    $
    284,074,000
 -10-




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##### Table of Contents



Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalIncome before income
taxes
    
    $
    22,639,000
    
    
    $
    1,953,000
    
    
    $
    (243,000
    )(1)
    
    $
    24,349,000
 
 (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
  For the Quarter Ended June 30,2008
    
    
    2007Housekeeping services
    
    $
    82,257,000
    
    
    $
    80,431,000Laundry and linen services
    
    
    37,365,000
    
    
    
    34,636,000Food Services
    
    
    27,703,000
    
    
    
    27,296,000Maintenance services
and Other
    
    
    593,000
    
    
    
    544,000$
    147,918,000
    
    
    $
    142,907,000
 For the Six Months Ended June 30,2008
    
    
    2007Housekeeping services
    
    $
    164,875,000
    
    
    $
    159,959,000Laundry and linen services
    
    
    74,207,000
    
    
    
    68,848,000Food Services
    
    
    55,010,000
    
    
    
    54,103,000Maintenance services
and Other
    
    
    1,085,000
    
    
    
    1,164,000$
    295,177,000
    
    
    $
    284,074,000
 Major Client
  2008
    
    2008Six months
    
    2nd quarterTotal revenues
    
    
    15
    %
    
    
    15
    %Housekeeping
    
    
    14
    %
    
    
    14
    %Food
    
    
    19
    %
    
    
    18
    %
 2007
    
    2007Six months
    
    2nd quarterTotal revenues
    
    
    16
    %
    
    
    16
    %Housekeeping
    
    
    15
    %
    
    
    15
    %Food
    
    
    22
    %
    
    
    22
    %
  -11-




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##### Table of Contents



Note 6   Earnings Per Common Share
  Quarter Ended June 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    6,953,000Basic earnings per
common share
    
    $
    6,953,000
    
    
    
    43,080,000
    
    
    $
    .16Effect of dilutive securities:Options
    
    
    
    
    
    
    882,000Diluted earnings per
common share
    
    $
    6,953,000
    
    
    
    43,962,000
    
    
    $
    .16
 Quarter Ended June 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,524,000Basic earnings per
common share
    
    $
    7,524,000
    
    
    
    42,131,000
    
    
    $
    .18Effect of dilutive securities:Options
    
    
    
    
    
    
    1,579,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    7,524,000
    
    
    
    43,710,000
    
    
    $
    .17
 -12-




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##### Table of Contents



Six Months Ended June 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    13,810,000Basic earnings per
common share
    
    $
    13,810,000
    
    
    
    43,048,000
    
    
    $
    .32Effect of dilutive securities:Options
    
    
    
    
    
    
    1,040,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    13,810,000
    
    
    
    44,088,000
    
    
    $
    .31
 Six Months Ended June 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    14,974,000Basic earnings per
common share
    
    $
    14,974,000
    
    
    
    41,895,000
    
    
    $
    .36Effect of dilutive securities:Options
    
    
    
    
    
    
    1,793,000
    
    
    
    (.02
    )Diluted earnings per
common share
    
    $
    14,974,000
    
    
    
    43,688,000
    
    
    $
    .34
   Note 7  Dividends
  1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .13
    
    
    $
    .14Total cash dividends paid
    
    $
    5,579,000
    
    
    $
    6,024,000Record date
    
    February 4
    
    April 25Payment date
    
    February 15
    
    May 12
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##### Table of Contents



Note 8  Share-Based Compensation
 Stock Options
  WeightedAverageRemainingWeighted
    
    
    
    
    
    
    Contractual
    
    
    AggregateAverage
    
    
    Number
    
    
    Life
    
    
    IntrinsicPrice
    
    
    of Shares
    
    
    (In Years)
    
    
    ValueOutstanding, January 1, 2008
    
    $
    6.34
    
    
    
    2,412,000Granted
    
    
    20.89
    
    
    
    372,000Cancelled
    
    
    7.94
    
    
    
    (29,000
    )Exercised
    
    
    4.39
    
    
    
    (556,000
    )Outstanding at June 30, 2008
    
    $
    9.27
    
    
    
    2,199,000
    
    
    
    5.07
    
    
    $
    15,189,000Options exercisable as of June 30, 2008
    
    
    
    
    
    
    1,830,000
    
    
    
    4.18
    
    
    $
    15,189,000
  Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice Range
    
    
    
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    1.50 - 2.74
    
    
    
    
    
    445,000
    
    
    
    2.25
    
    
    $
    2.42
    
    
    
    445,000
    
    
    $
    2.423.01 - 5.53
    
    
    
    
    
    625,000
    
    
    
    5.03
    
    
    
    4.77
    
    
    
    625,000
    
    
    
    4.779.10 - 9.10
    
    
    
    
    
    401,000
    
    
    
    6.49
    
    
    
    9.10
    
    
    
    401,000
    
    
    
    9.1013.81 - 13.81
    
    
    
    
    
    358,000
    
    
    
    2.52
    
    
    
    13.81
    
    
    
    358,000
    
    
    
    13.81$
    20.89 - 20.89
    
    
    
    
    
    370,000
    
    
    
    9.51
    
    
    
    20.89
    
    
    
    0
    
    
    
    2,199,000
    
    
    
    5.07
    
    
    $
    9.27
    
    
    
    1,829,000
    
    
    $
    6.92
  June
    
    June30, 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:
    
    $
    8,505,000
    
    
    $
    13,389,000
  -14-




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##### Table of Contents



Risk-free interest rate
    
    
    4.2
    %Expected volatility
    
    
    35.9
    %Weighted average expected life in years
    
    
    4.5Dividend yield
    
    
    2.0
    %
 Employee Stock Purchase Plan
  2008
    
    20072nd Quarter
    
    Six Months
    
    2nd Quarter
    
    Six Months$91,000
    
    $158,000
    
    $89,000
    
    $192,000
   20082nd Quarter
    
    Six 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
    %
 20072nd Quarter
    
    Six MonthsRisk-free interest rate
    
    
    4.8
    %
    
    
    4.8
    %Expected volatility
    
    
    27.5
    %
    
    
    27.5
    %Weighted average expected life (in years)
    
    
    .5
    
    
    
    .5Dividend yield
    
    
    2.0
    %
    
    
    2.0
    %
  -15-




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##### Table of Contents



Note 9  Related Party Transactions
   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
       -19-




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##### Table of Contents



Consolidated Operations
  Relation to Consolidated RevenuesFor the Quarter Ended June 30,
    
    For the Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    85.9
    
    
    
    85.1
    
    
    
    85.7
    
    
    
    85.0Selling, general and
administration
    
    
    6.9
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.2Investment and interest income
    
    
    .4
    
    
    
    .7
    
    
    
    .3
    
    
    
    .8Income before income taxes
    
    
    7.6
    
    
    
    8.6
    
    
    
    7.6
    
    
    
    8.6Income taxes
    
    
    2.9
    
    
    
    3.3
    
    
    
    2.9
    
    
    
    3.3Net income
    
    
    4.7
    %
    
    
    5.3
    %
    
    
    4.7
    %
    
    
    5.3
    %
    2008 Second Quarter Compared with 2007 Second Quarter
  Reportable SegmentsHousekeeping
    
    FoodPercent
    
    Corporate and
    
    
    
    
    
    %incr
    
    
    
    
    
    %incrConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    (decr)
    
    Amount
    
    (decr)Revenues
    
    $
    147,918,000
    
    
    
    3.5
    %
    
    $
    374,000
    
    
    $
    119,952,000
    
    
    
    4.2
    %
    
    $
    27,592,000
    
    
    
    1.5
    %Cost of services provided
    
    
    127,074,000
    
    
    
    4.5
    
    
    
    (8,542,000
    )
    
    
    108,725,000
    
    
    
    4.7
    
    
    
    26,891,000
    
    
    
    1.9Selling, general and
administrative expense
    
    
    10,124,000
    
    
    
    .2
    
    
    
    10,124,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    585,000
    
    
    
    (44.1
    )
    
    
    585,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    11,305,000
    
    
    
    (7.6
    )%
    
    
    (623,000
    )
    
    $
    11,227,000
    
    
    
    (.8
    )%
    
    $
    701,000
    
    
    
    (9.2
    )%
 -20-




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##### Table of Contents



Revenues
 Consolidated
   Reportable Segments
    Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    (Decr) %Bad debt provision
    
    
    .2
    
    
    
    .6
    
    
    
    (.4
    )Workers compensation and general
liability insurance
    
    
    3.9
    
    
    
    3.3
    
    
    
    .6
   -21-




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##### Table of Contents



Reportable Segments
   IncrCost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    (Decr) %Housekeeping labor and other labor costs
    
    
    81.6
    
    
    
    81.6
    
    
    
    Housekeeping supplies
    
    
    5.6
    
    
    
    5.6
    
    
    
    Food labor and other labor costs
    
    
    53.5
    
    
    
    55.0
    
    
    
    (1.5
    )Food supplies
    
    
    39.9
    
    
    
    38.0
    
    
    
    1.9
   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 Six Month Period Compared with 2007 Six Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    295,177,000
    
    
    
    3.9
    %
    
    $
    874,000
    
    
    $
    239,470,000
    
    
    
    4.9
    %
    
    $
    54,833,000
    
    
    
    2.1
    %Cost of services
provided
    
    
    252,928,000
    
    
    
    4.8
    
    
    
    (16,353,000
    )
    
    
    216,427,000
    
    
    
    5.2
    
    
    
    52,854,000
    
    
    
    2.1Selling, general and
administrative expense
    
    
    20,703,000
    
    
    
    .4
    
    
    
    20,703,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and
interest income
    
    
    909,000
    
    
    
    (60.6
    )
    
    
    909,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income
taxes
    
    $
    22,455,000
    
    
    
    (7.8
    )%
    
    
    (2,567,000
    )
    
    $
    23,043,000
    
    
    
    1.8
    %
    
    $
    1,979,000
    
    
    
    1.4
    %
 Revenues
 Consolidated
   Reportable Segments
    -23-




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##### Table of Contents



Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    (Decr) %Bad debt provision
    
    
    .3
    
    
    
    1.0
    
    
    
    (.7
    )Workers compensation and general
liability insurance
    
    
    3.1
    
    
    
    3.2
    
    
    
    (.1
    )
   Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2008 %
    
    2007 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.3
    
    
    
    81.4
    
    
    
    (.1
    )Housekeeping supplies
    
    
    6.1
    
    
    
    5.2
    
    
    
    .9Food labor and other labor costs
    
    
    53.6
    
    
    
    54.5
    
    
    
    (.9
    )Food supplies
    
    
    39.6
    
    
    
    37.8
    
    
    
    1.8
   Consolidated Selling, General and Administrative Expense
  -24-




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##### Table of Contents



Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -25-




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##### Table of Contents



Critical Accounting Policies and Estimates
    Allowance for Doubtful Accounts
    -26-




---



##### 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 AccountsJune
30, 2008
    
    $
    9,229,000
    
    
    $
    3,000
    
    
    $
    850,000
    
    
    $
    5,131,000December
31, 2007
    
    $
    9,363,000
    
    
    $
    4,574,000
    
    
    $
    6,142,000
    
    
    $
    4,284,000
   Accrued Insurance Claims
  -27-




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##### Table of Contents



Asset Valuations and Review for Potential Impairment
  -28-




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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
    Investing Activities
  Financing Activities
  -29-




---



##### Table of Contents



1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .13
    
    
    $
    .14Total cash dividends paid
    
    $
    5,579,000
    
    
    $
    6,024,000Record date
    
    February 4
    
    April 25Payment date
    
    February 15
    
    May 12
    Reclassification of Deferred Compensation Plan Obligation
  Line of Credit
   -30-




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##### Table of Contents



Covenant Description and Requirement
    
    Status at June 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 3.4Tangible net worth: must exceed $146,000,000.
    
    Tangible net worth is $179,253,000
  Accounts and Notes Receivable
   -31-




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##### Table of Contents



Insurance Programs
     -32-




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##### Table of Contents



Capital Expenditures
  Material Off-Balance Sheet Arrangements
  Effects of Inflation
  -33-




---



##### Table of Contents



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Certifications
  -34-




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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 programsApril 1 to
April 30
    
    
    251,000
    
    
    $
    15.13
    
    
    
    251,000
    
    
    
    1,131,000May 1 to
May 31
    
    noneJune 1 to
June 30
    
    none
 
 ITEM 3 Defaults under Senior Securities.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders
   Shares votedDirector
    
    FOR
    
    WithheldDaniel P. McCartney
    
    
    31,371,000
    
    
    
    9,415,000Barton D. Weisman
    
    
    39,789,000
    
    
    
    996,000Joseph F. McCartney
    
    
    24,643,000
    
    
    
    16,143,000Robert L. Frome
    
    
    25,147,000
    
    
    
    15,638,000Thomas A. Cook
    
    
    30,430,000
    
    
    
    10,356,000Robert J. Moss
    
    
    32,345,000
    
    
    
    8,440,000John M. Briggs
    
    
    39,816,000
    
    
    
    969,000Dino D. Ottaviano
    
    
    39,994,000
    
    
    
    791,000
  Shares Voted
    
    Shares Voted
    
    Shares
    
    BrokerFOR
    
    AGAINST
    
    ABSTAINING
    
    Non-votes40,497,000
    
    281,000
    
    7,000
    
    1,000
 -35-




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##### Table of Contents



ITEM 5. Other Information.
  
 ITEM 6. Exhibits
  31.1
    
    Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135032.2
    
    Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
 -36-




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##### Table of Contents



SIGNATURES
  HEALTHCARE SERVICES GROUP, INC.July 18, 2008
    
    
    
    
    
    /s/ Daniel P. McCartneyDate
    
    
    
    
    
    DANIEL P. McCARTNEY, ChiefExecutive OfficerJuly 18, 2008
    
    
    
    
    
    /s/ Richard W. HudsonDate
    
    
    
    
    
    RICHARD W. HUDSON, ChiefFinancial Officer and Secretary
 -37-