##### 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, 2007
 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
  þ o o
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##### Table of Contents



INDEX
 PAGE NO.PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2007 and  December 31, 2006
    
    2Consolidated Statements of Income for the Three Months Ended June 30, 2007 and June 30, 2006
    
    3Consolidated Statements of Income for the Six Months Ended June 30, 2007 and June 30, 2006
    
    4Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and June 30, 2006
    
    5Consolidated Statement of Stockholders Equity for the Six Months Ended June 30, 2007
    
    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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Consolidated Balance Sheets
 (Unaudited)June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    73,450,000
    
    
    $
    72,997,000Accounts and notes receivable, less allowance for doubtful
accounts of $5,376,000 in 2007 and $2,716,000 in 2006
    
    
    84,323,000
    
    
    
    78,086,000Inventories and supplies
    
    
    13,523,000
    
    
    
    12,640,000Prepaid income taxes
    
    
    4,174,000
    
    
    
    Deferred income taxes
    
    
    1,481,000
    
    
    
    652,000Prepaid expenses and other
    
    
    4,762,000
    
    
    
    3,862,000Total current assets
    
    
    181,713,000
    
    
    
    168,237,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,729,000
    
    
    
    1,781,000Housekeeping equipment and office furniture
    
    
    16,486,000
    
    
    
    16,086,000Autos and trucks
    
    
    94,000
    
    
    
    85,00018,309,000
    
    
    
    17,952,000Less accumulated depreciation
    
    
    13,824,000
    
    
    
    13,077,0004,485,000
    
    
    
    4,875,000GOODWILL, Less accumulated amortization of $1,743,000 in 2007 and 2006
    
    
    14,563,000
    
    
    
    14,543,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of
of $881,000 in 2007 and $352,000 in 2006
    
    
    6,619,000
    
    
    
    7,148,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    7,575,000
    
    
    
    7,861,000DEFERRED COMPENSATION FUNDING
    
    
    10,372,000
    
    
    
    7,385,000DEFERRED INCOME TAXES- long term portion
    
    
    6,326,000
    
    
    
    5,403,000OTHER NONCURRENT ASSETS
    
    
    104,000
    
    
    
    104,000TOTAL ASSETS
    
    $
    231,757,000
    
    
    $
    215,556,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    7,741,000
    
    
    $
    10,139,000Accrued payroll, accrued and withheld payroll taxes
    
    
    8,942,000
    
    
    
    10,125,000Other accrued expenses
    
    
    1,360,000
    
    
    
    2,425,000Income taxes payable
    
    
    
    
    
    
    274,000Accrued insurance claims
    
    
    4,904,000
    
    
    
    4,647,000Total current liabilities
    
    
    22,947,000
    
    
    
    27,610,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    11,442,000
    
    
    
    10,843,000DEFERRED COMPENSATION LIABILITY
    
    
    10,567,000
    
    
    
    11,626,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
29,616,000 shares issued in 2007 and 28,999,000 in 2006
    
    
    296,000
    
    
    
    290,000Additional paid in capital
    
    
    72,268,000
    
    
    
    58,809,000Retained earnings
    
    
    131,170,000
    
    
    
    124,268,000Common stock in treasury, at cost, 1,415,000 shares in 2007 and
1,517,000 in 2006
    
    
    (16,933,000
    )
    
    
    (17,890,000
    )Total stockholders equity
    
    
    186,801,000
    
    
    
    165,477,000TOTAL LIABILITITIES AND STOCKHOLDERS EQUITY
    
    $
    231,757,000
    
    
    $
    215,556,000
  -2-




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Consolidated Statements of Income
 (Unaudited)
 For the Three Months Ended June 30,2007
    
    
    2006Revenues
    
    $
    142,377,000
    
    
    $
    122,840,000Operating costs and expenses:Costs of services provided
    
    
    121,085,000
    
    
    
    105,843,000Selling, general and administrative
    
    
    10,105,000
    
    
    
    7,957,000Other Income :Investment and interest
    
    
    1,047,000
    
    
    
    973,000Income before income taxes
    
    
    12,234,000
    
    
    
    10,013,000Income taxes
    
    
    4,710,000
    
    
    
    3,705,000Net Income
    
    $
    7,524,000
    
    
    $
    6,308,000Basic earnings per Common Share
    
    $
    0.27
    
    
    $
    0.23Diluted earnings per Common Share
    
    $
    0.26
    
    
    $
    0.22Cash dividends per Common Share
    
    $
    0.15
    
    
    $
    0.11Basic weighted average number of
Common Shares outstanding
    
    
    28,087,000
    
    
    
    27,414,000Diluted weighted average number of
Common Shares outstanding
    
    
    29,140,000
    
    
    
    28,691,000
  -3-




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Consolidated Statements of Income
(Unaudited)
 For the Six Months Ended June 30,2007
    
    
    2006Revenues
    
    $
    283,056,000
    
    
    $
    241,758,000Operating costs and expenses:Costs of services provided
    
    
    240,398,000
    
    
    
    208,025,000Selling, general and administrative
    
    
    20,616,000
    
    
    
    17,031,000Other Income :Investment and interest
    
    
    2,307,000
    
    
    
    2,320,000Income before income taxes
    
    
    24,349,000
    
    
    
    19,022,000Income taxes
    
    
    9,375,000
    
    
    
    7,038,000Net Income
    
    $
    14,974,000
    
    
    $
    11,984,000Basic earnings per Common Share
    
    $
    0.54
    
    
    $
    0.44Diluted earnings per Common Share
    
    $
    0.51
    
    
    $
    0.42Cash dividends per Common Share
    
    $
    0.29
    
    
    $
    0.21Basic weighted average number of
Common Shares outstanding
    
    
    27,930,000
    
    
    
    27,367,000Diluted weighted average number of
Common Shares outstanding
    
    
    29,125,000
    
    
    
    28,656,000
  -4-




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Consolidated Statements of Cash Flows
 (Unaudited)For the Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net Income
    
    $
    14,974,000
    
    
    $
    11,984,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    1,536,000
    
    
    
    952,000Bad debt provision
    
    
    2,827,000
    
    
    
    625,000Deferred income taxes benefits
    
    
    (1,752,000
    )
    
    
    (693,000
    )Stock-based compensation expense
    
    
    202,000
    
    
    
    116,000Unrealized gain on deferred compensation
fund investments
    
    
    (620,000
    )
    
    
    (364,000
    )Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (9,064,000
    )
    
    
    (6,054,000
    )Prepaid income taxes
    
    
    (4,174,000
    )
    
    
    Inventories and supplies
    
    
    (883,000
    )
    
    
    (319,000
    )Notes receivable- long term portion
    
    
    286,000
    
    
    
    (887,000
    )Deferred compensation funding
    
    
    (736,000
    )
    
    
    (248,000
    )Accounts payable and other accrued expenses
    
    
    (3,173,000
    )
    
    
    1,438,000Accrued payroll, accrued and withheld payroll taxes
    
    
    (410,000
    )
    
    
    (357,000
    )Accrued insurance claims
    
    
    855,000
    
    
    
    855,000Deferred compensation liability
    
    
    727,000
    
    
    
    858,000Income taxes payable
    
    
    (274,000
    )
    
    
    (1,091,000
    )Prepaid expenses and other assets
    
    
    (901,000
    )
    
    
    (528,000
    )Net cash provided by (used in) operating activities
    
    
    (580,000
    )
    
    
    6,287,000Cash flows from investing activities:Disposals of fixed assets
    
    
    109,000
    
    
    
    95,000Additions to property and equipment
    
    
    (726,000
    )
    
    
    (1,012,000
    )Cash paid for acquisition
    
    
    (20,000
    )
    
    
    Net cash used in investing activities
    
    
    (637,000
    )
    
    
    (917,000
    )Cash flows from financing activities:Treasury stock transactions in benefit plans
    
    
    436,000
    
    
    
    (79,000
    )Dividends paid
    
    
    (8,072,000
    )
    
    
    (5,745,000
    )Acquisition of treasury stock
    
    
    
    
    
    
    (613,000
    )Reissuance of treasury stock pursuant to Dividend
Reinvestment Plan
    
    
    29,000
    
    
    
    20,000Proceeds from the exercise of stock options
    
    
    4,210,000
    
    
    
    1,597,000Tax benefit from equity compensation plans
    
    
    5,067,000
    
    
    
    763,000Net cash provided by (used in) financing activities
    
    
    1,670,000
    
    
    
    (4,057,000
    )Net increase in cash and cash equivalents
    
    
    453,000
    
    
    
    1,313,000Cash and cash equivalents at beginning of the period
    
    
    72,997,000
    
    
    
    91,005,000Cash and cash equivalents at end of the period
    
    $
    73,450,000
    
    
    $
    92,318,000Supplementary Cash Flow Information:Income taxes cash payments, net of refunds
    
    $
    10,508,000
    
    
    $
    8,057,000Reclassification of deferred compensation obligation pursuant
to plan amendment
    
    $
    3,426,000
    
    
    $
    Issuance of 43,000 shares of Common Stock in 2007 and
64,000 shares of Common Stock in 2006 pursuant to
Employee Stock Plans
    
    $
    1,254,000
    
    
    $
    728,000
  -5-




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For the Six Months Ended June 30, 2007AdditionalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December 31, 2006
    
    
    28,999,000
    
    
    $
    290,000
    
    
    $
    58,809,000
    
    
    $
    124,268,000
    
    
    
    ($17,890,000
    )
    
    $
    165,477,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,974,000
    
    
    
    
    
    
    
    14,974,000Exercise of stock options and other stock-based compensation,
net of 10,000 shares tendered for payment
    
    
    617,000
    
    
    
    6,000
    
    
    
    4,204,000
    
    
    
    
    
    
    
    
    
    
    
    4,210,000Tax benefit arising from equity compensation plans transactions
    
    
    
    
    
    
    
    
    
    
    5,067,000
    
    
    
    
    
    
    
    
    
    
    
    5,067,000Shares purchased and shares sold in employee Deferred
Compensation Plan and other benefit plans (59,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436,000
    
    
    
    436,000Shares issued pursuant to Employee Stock Plans (43,000 shares)
    
    
    
    
    
    
    
    
    
    
    745,000
    
    
    
    
    
    
    
    509,000
    
    
    
    1,254,000Cash dividends  $.29 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,072,000
    )
    
    
    
    
    
    
    (8,072,000
    )Shares issued pursuant to Dividend Reinvestment Plan (1,000 shares)
    
    
    
    
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    12,000
    
    
    
    29,000Reclassification of deferred compensation plan obligation
    
    
    
    
    
    
    
    
    
    
    3,426,000
    
    
    
    
    
    
    
    
    
    
    
    3,426,000Balance, June 30, 2007
    
    
    29,616,000
    
    
    $
    296,000
    
    
    $
    72,268,000
    
    
    $
    131,170,000
    
    
    
    ($16,933,000
    )
    
    $
    186,801,000
  -6-




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1   Basis of Reporting
   Note 2   Acquisition
   -7-




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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, 2007
    
    $
    479,000
    
    
    $
    50,000
    
    
    $
    529,0002008
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002009
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002010
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,0002011
    
    $
    957,000
    
    
    $
    100,000
    
    
    $
    1,057,000
  Summit
    
    
    All other
    
    
    TotalGoodwill as of December 31, 2006
    
    $
    12,931,000
    
    
    $
    1,612,000
    
    
    $
    14,543,000Goodwill adjustments during 2007 six
month period ended June 30(1)
    
    
    20,000
    
    
    
    
    
    
    
    20,000Goodwill as of June 30, 2007
    
    $
    12,951,000
    
    
    $
    1.612,000
    
    
    $
    14,563,000
 
 (1)
    
    Goodwill adjusted during the six month period relates to professional fees expense incurred
in connection with the Summit acquisition. -8-




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Segment
    
    AmountFood
    
    $
    1,350,000Housekeeping
    
    
    13,213,000Total
    
    $
    14,563,000
 Note 4   Other Contingencies
       -9-




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Note 5   Segment Information
 Reportable Operating Segments
    Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalQuarter Ended June 30, 2007Revenues
    
    $
    115,137,000
    
    
    $
    27,174,000
    
    
    $
    66,000
    
    
    $
    142,377,000Income before income
taxes
    
    $
    11,319,000
    
    
    $
    772,000
    
    
    $
    143,000
    (1)
    
    $
    12,234,000Quarter Ended June 30, 2006Revenues
    
    $
    98,291,000
    
    
    $
    24,673,000
    
    
    $
    (124,000
    )
    
    $
    122,840,000Income before income
taxes
    
    $
    9,436,000
    
    
    $
    915,000
    
    
    $
    (338,000
    )(1)
    
    $
    10,013,000
 -10-




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Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalSix Months Ended June 30,
2007Revenues
    
    $
    228,339,000
    
    
    $
    53,726,000
    
    
    $
    991,000
    
    
    $
    283,056,000Income before income
taxes
    
    $
    22,639,000
    
    
    $
    1,953,000
    
    
    $
    (243,000
    )(1)
    
    $
    24,349,000Six Months Ended June 30,
2006Revenues
    
    $
    193,150,000
    
    
    $
    47,712,000
    
    
    $
    896,000
    
    
    $
    241,758,000Income before income
taxes
    
    $
    18,851,000
    
    
    $
    1,617,000
    
    
    $
    (1,446,000
    )(1)
    
    $
    19,022,000
 
 (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 30,2007
    
    
    2006Housekeeping services
    
    $
    80,431,000
    
    
    $
    69,039,000Laundry and linen services
    
    
    34,636,000
    
    
    
    28,880,000Food Services
    
    
    26,766,000
    
    
    
    24,301,000Maintenance services
and Other
    
    
    544,000
    
    
    
    620,000$
    142,377,000
    
    
    $
    122,840,000
 For the Six Months Ended June 30,2007
    
    
    2006Housekeeping services
    
    $
    159,959,000
    
    
    $
    136,347,000Laundry and linen services
    
    
    68,848,000
    
    
    
    56,971,000Food Services
    
    
    53,085,000
    
    
    
    47,210,000Maintenance services
and Other
    
    
    1,164,000
    
    
    
    1,230,000$
    283,056,000
    
    
    $
    241,758,000
 Major Client
  2007
    
    2007Six months
    
    2nd quarterTotal revenues
    
    
    16
    %
    
    
    16
    %Housekeeping
    
    
    15
    %
    
    
    15
    %Food
    
    
    22
    %
    
    
    22
    %
 2006
    
    2006Six months
    
    2nd quarterTotal revenues
    
    
    19
    %
    
    
    19
    %Housekeeping
    
    
    17
    %
    
    
    17
    %Food
    
    
    27
    %
    
    
    27
    %
 -11-




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.
 Note 6   Earnings Per Common Share
  Quarter Ended June 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,524,000Basic earnings per
common share
    
    $
    7,524,000
    
    
    
    28,087,000
    
    
    $
    .27Effect of dilutive securities:Options
    
    
    
    
    
    
    1,053,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    7,524,000
    
    
    
    29,140,000
    
    
    $
    .26
 Quarter Ended June 30, 2006Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    6,308,000Basic earnings per
common share
    
    $
    6,308,000
    
    
    
    27,414,000
    
    
    $
    .23Effect of dilutive securities:Options
    
    
    
    
    
    
    1,277,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    6,308,000
    
    
    
    28,691,000
    
    
    $
    .22
 -12-




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Six Months Ended June 30, 2007Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    14,974,000Basic earnings per
common share
    
    $
    14,974,000
    
    
    
    27,930,000
    
    
    $
    .54Effect of dilutive securities:Options
    
    
    
    
    
    
    1,195,000
    
    
    
    (.03
    )Diluted earnings per
common share
    
    $
    14,974,000
    
    
    
    29,125,000
    
    
    $
    .51
 Six Months Ended June 30, 2006Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    11,984,000Basic earnings per
common share
    
    $
    11,984,000
    
    
    
    27,367,000
    
    
    $
    .44Effect of dilutive securities:Options
    
    
    
    
    
    
    1,289,000
    
    
    
    (.02
    )Diluted earnings per
common share
    
    $
    11,984,000
    
    
    
    28,656,000
    
    
    $
    .42
   Note 7  Dividends
  1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .14
    
    
    $
    .15Total cash dividends paid
    
    $
    3,886,000
    
    
    $
    4,186,000Record date
    
    

    February 5

    

    April 27Payment date
    
    
    February 14

    

    May 11
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Note 8  Share-Based Compensation
  WeightedAverageRemainingContractual
    
    
    AggregateWeighted Average
    
    
    Number
    
    
    Life
    
    
    IntrinsicPrice
    
    
    of Shares
    
    
    ( In Years)
    
    
    ValueOutstanding, January 1, 2007
    
    $
    8.70
    
    
    
    2,434,000Granted
    
    
    
    
    
    
    Cancelled
    
    
    20.71
    
    
    
    (1,000
    )Exercised
    
    
    6.87
    
    
    
    628,000
    )Outstanding and exercisable
at June 30, 2007
    
    $
    9.34
    
    
    
    1,805,000
    
    
    
    4.86
    
    
    $
    36,406,000
  Options Outstanding
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice Range
    
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    2.25 
    
    4.11
    
    
    

    

    
    
    
    618,000
    
    
    
    3.14
    
    
    $
    3.76
    
    
    
    618,000
    
    
    $
    3.76$
    5.43 
    
    8.29
    
    
    
    

    
    
    
    583,000
    
    
    
    6.06
    
    
    
    7.17
    
    
    
    583,000
    
    
    
    7.17$
    13.65 
    
    13.65
    
    
    
    

    
    
    
    306,000
    
    
    
    7.49
    
    
    
    13.65
    
    
    
    306,000
    
    
    
    13.65$
    20.71 

    
    20.71
    
    
    
    

    
    
    
    298,000
    
    
    
    3.50
    
    
    
    20.71
    
    
    
    298,000
    
    
    
    20.711,805,000
    
    
    
    4.86
    
    
    $
    9.34
    
    
    
    1,805,000
    
    
    $
    9.34
  June
    
    
    June30, 2007
    
    
    30,2006Weighted average grant-date fair value of stock options granted:
    
    Not applicable
    
    Not applicableTotal fair value of stock options vested:
    
    Not applicable
    
    Not applicableTotal pre-tax intrinsic value of stock options exercised:
    
    $
    13,389,000
    
    
    $
    2,226,000
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##### Table of Contents



2007
    
    2006Quarter
    
    Six Months
    
    Quarter
    
    Six MonthsPre-tax shared-based compensation expense
    
    $
    89,000
    
    
    $
    192,000
    
    
    $
    35,000
    
    
    $
    116,000Risk-free interest rate
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.5
    %
    
    
    4.5
    %Expected volatility
    
    
    27.5
    %
    
    
    27.5
    %
    
    
    34.5
    %
    
    
    34.5
    %Weighted average expected life (in years)
    
    
    .5
    
    
    
    .5
    
    
    
    .5
    
    
    
    .5Dividend yield
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.1
    %
    
    
    2.1
    %
   Note 9  Related Party Transactions
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Note 10- Cumulative Effect of Adjustment to Deferred Compensation Liability
   -16-




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##### Table of Contents



Note 11- Income Taxes
    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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    85.0
    
    
    
    86.2
    
    
    
    84.9
    
    
    
    86.1Selling, general and
administration
    
    
    7.1
    
    
    
    6.5
    
    
    
    7.3
    
    
    
    7.0Investment and interest income
    
    
    .7
    
    
    
    .8
    
    
    
    .8
    
    
    
    1.0Income before income taxes
    
    
    8.6
    
    
    
    8.1
    
    
    
    8.6
    
    
    
    7.9Income taxes
    
    
    3.3
    
    
    
    3.0
    
    
    
    3.3
    
    
    
    2.9Net income
    
    
    5.3
    %
    
    
    5.1
    %
    
    
    5.3
    %
    
    
    5.0
    %
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##### Table of Contents



2007 Second Quarter Compared with 2006 Second Quarter
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    increase
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    142,377,000
    
    
    
    15.9
    %
    
    $
    66,000
    
    
    $
    115,137,000
    
    
    
    17.1
    %
    
    $
    27,174,000
    
    
    
    10.1
    %Cost of services provided
    
    
    121,085,000
    
    
    
    14.4
    
    
    
    ( 9,135,000
    )
    
    
    103,818,000
    
    
    
    16.8
    
    
    
    26,402,000
    
    
    
    11.1Selling, general and
administrative expense
    
    
    10,105,000
    
    
    
    27.0
    
    
    
    10,105,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    1,047,000
    
    
    
    7.6
    
    
    
    1,047,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    12,234,000
    
    
    
    22.2
    %
    
    
    143,000
    
    
    $
    11,319,000
    
    
    
    19.9
    %
    
    $
    772,000
    
    
    
    (15.6
    )%
 Revenues
 Consolidated
  .
 -21-




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##### Table of Contents



Reportable Segments
    Costs of services provided
 Consolidated
  Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    

Incr (Decr) %Bad debt provision
    
    
    .6
    
    
    
    .2
    
    
    
    .4Workers compensation and general
liability insurance
    
    
    3.3
    
    
    
    4.0
    
    
    
    (.7
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.6
    
    
    
    81.4
    
    
    
    .2Housekeeping supplies
    
    
    5.6
    
    
    
    5.4
    
    
    
    .2Food labor and other labor costs
    
    
    55.0
    
    
    
    54.3
    
    
    
    .7Food supplies
    
    
    36.0
    
    
    
    37.0
    
    
    
    ( 1.0
    )
  -22-




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##### Table of Contents



Consolidated Selling, General and Administrative Expense
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Investment and Interest Income
  Consolidated Income Taxes
  -23-




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##### Table of Contents



Consolidated Net Income
  2007 Six Month Period Compared with 2006 Six Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    283,056,000
    
    
    
    17.1
    %
    
    $
    991,000
    
    
    $
    228,339,000
    
    
    
    18.2
    %
    
    $
    53,726,000
    
    
    
    12.6
    %Cost of services provided
    
    
    240,398,000
    
    
    
    15.6
    
    
    
    (17,075,000
    )
    
    
    205,699,000
    
    
    
    18.0
    
    
    
    51,774,000
    
    
    
    12.3Selling, general and
administrative expense
    
    
    20,616,000
    
    
    
    21.0
    
    
    
    20,616,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    2,307,000
    
    
    
    ( .5
    )
    
    
    2,307,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    24,349,000
    
    
    
    28.0
    %
    
    
    (242,000
    )
    
    $
    22,639,000
    
    
    
    20.1
    %
    
    $
    1,952,000
    
    
    
    20.7
    %
 Revenues
 Consolidated
   Reportable Segments
    Costs of services provided
 Consolidated
  -24-




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##### Table of Contents



IncrCost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    (Decr) %Bad debt provision
    
    
    1.0
    
    
    
    .3
    
    
    
    .7Workers compensation and general
liability insurance
    
    
    3.2
    
    
    
    3.8
    
    
    
    (.6
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.4
    
    
    
    81.3
    
    
    
    .1Housekeeping supplies
    
    
    5.2
    
    
    
    5.4
    
    
    
    (.2
    )Food labor and other labor costs
    
    
    54.5
    
    
    
    54.4
    
    
    
    .1Food supplies
    
    
    35.9
    
    
    
    37.3
    
    
    
    (1.4
    )
   Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
  -25-




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##### Table of Contents



Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -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 AccountsJune 30,
2007
    
    $
    10,473,000
    
    
    $
    167,000
    
    
    $
    2,827,000
    
    
    $
    5,376,000December
31, 2006
    
    $
    6,098,000
    
    
    $
    181,000
    
    
    $
    622,000
    
    
    $
    2,716,000
   -28-




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##### Table of Contents



Accrued Insurance Claims
 
   Asset Valuations and Review for Potential Impairment
  -29-




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
  Investing Activities
  Financing Activities
  1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .14
    
    
    $
    .15Total cash dividends paid
    
    $
    3,886,000
    
    
    $
    4,186,000Record date
    
    
    February 5
    
    April 27Payment date
    
    
    February 14
    
    May 11
   -30-




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##### Table of Contents



Reclassification of Deferred Compensation Plan Obligation
  Line of Credit
   Covenant Description and Requirement
    
    Status at June 30, 2007Commitment coverage ratio: cash and cash
equivalents must equal or exceed outstanding
obligations under the line by a multiple of
2.
    
    Commitment coverage is 2.7Tangible net worth: must exceed $132,000,000.
    
    Tangible net worth is $165,619,000
  Accounts and Notes Receivable
  -31-




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##### Table of Contents



Insurance Programs
 -32-




---



##### 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
  
 ITEM 3 Defaults under Senior Securities.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    All of managements nominees for directors were elected as follows:
 Shares votedDirector
    
    FOR
    
    WithheldDaniel P. McCartney
    
    
    20,209,703
    
    
    
    5,287,900Barton D. Weisman
    
    
    24,978,417
    
    
    
    519,186Joseph F. McCartney
    
    
    18,244,364
    
    
    
    7,253,239Robert L. Frome
    
    
    18,650,021
    
    
    
    6,847,582Thomas A. Cook
    
    
    19,750,004
    
    
    
    5,747,599Robert J. Moss
    
    
    22,933,021
    
    
    
    2,564,582John M. Briggs
    
    
    24,767,984
    
    
    
    729,619Dino D. Ottaviano
    
    
    24,988,171
    
    
    
    509,432
 (2)
    
    Proposal for the approval of an amendment to the Companys Articles of Incorporation
which increases the number of authorized shares of Common Stock of the Company from
30,000,000 to 100,000,000 was approved as follows:
 Shares Voted
    
    Shares Voted
    
    Shares
    
    BrokerFOR
    
    AGAINST
    
    ABSTAINING
    
    Non-votes17,903,583
    
    7,561,674
    
    31,781
    
    565
 (3)
    
    Proposal to approve and ratify selection of Grant Thornton LLP as the independent
certified public accountants of the Company for its fiscal year ending December 31, 2007 was
approved as follows:
 Shares Voted
    
    Shares Voted
    
    Shares
    
    BrokerFOR
    
    AGAINST
    
    ABSTAINING
    
    Non-votes25,367,582
    
    105,366
    
    24,095
    
    561
 -35-




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##### Table of Contents



ITEM 5. Other Information.
  
 ITEM 6. Exhibits
      -36-




---



##### Table of Contents



SIGNATURES
  HEALTHCARE SERVICES GROUP, INC.July 23, 2007
    
    /s/ Daniel P. McCartneyDate
    
    DANIEL P. McCARTNEY, ChiefExecutive OfficerJuly 23, 2007
    
    /s/ Thomas A. CookDate
    
    THOMAS A. COOK, President andChief Operating OfficerJuly 23, 2007
    
    /s/ Richard W. HudsonDate
    
    RICHARD W. HUDSON, ChiefFinancial Officer and Secretary
 -37-