##### 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, 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
(State or other jurisdiction of
    
    23-2018365
(IRS Employer Identificationincorporation or organization)
    
    number)
 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania 19020
 215-639-4274
  þ o
  þ o 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, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Income for the Three Months Ended September 30, 2007 and September 30, 2006
    
    
    3Consolidated Statements of Income for the Nine Months Ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2007 and 2006
    
    
    5Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2007
    
    
    6Notes To Consolidated Financial Statements
    
    7  18Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results Of Operations
    
    19  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
    
    
    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)September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    86,045,000
    
    
    $
    72,997,000Accounts and notes receivable, less allowance for doubtful
accounts of $3,412,000 in 2007 and $2,716,000 in 2006
    
    
    90,335,000
    
    
    
    78,086,000Prepaid income taxes
    
    
    2,304,000
    
    
    
    Inventories and supplies
    
    
    14,575,000
    
    
    
    12,640,000Deferred income taxes
    
    
    201,000
    
    
    
    652,000Prepaid expenses and other
    
    
    4,191,000
    
    
    
    3,862,000Total current assets
    
    
    197,651,000
    
    
    
    168,237,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,706,000
    
    
    
    1,781,000Housekeeping equipment and office furniture
    
    
    16,355,000
    
    
    
    16,086,000Autos and trucks
    
    
    103,000
    
    
    
    85,00018,164,000
    
    
    
    17,952,000Less accumulated depreciation
    
    
    13,773,000
    
    
    
    13,077,0004,391,000
    
    
    
    4,875,000GOODWILL, Less accumulated amortization of $1,743,000 in 2007 and 2006
    
    
    14,907,000
    
    
    
    14,543,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of
of $1,145,000 in 2007 and $352,000 in 2006
    
    
    6,355,000
    
    
    
    7,148,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    6,047,000
    
    
    
    7,861,000DEFERRED COMPENSATION FUNDING
    
    
    10,934,000
    
    
    
    7,385,000DEFERRED INCOME TAXES- long term portion
    
    
    6,148,000
    
    
    
    5,403,000OTHER NONCURRENT ASSETS
    
    
    90,000
    
    
    
    104,000TOTAL ASSETS
    
    $
    246,523,000
    
    
    $
    215,556,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    9,479,000
    
    
    $
    10,139,000Accrued payroll, accrued and withheld payroll taxes
    
    
    17,393,000
    
    
    
    10,125,000Other accrued expenses
    
    
    1,580,000
    
    
    
    2,425,000Income taxes payable
    
    
    
    
    
    
    274,000Accrued insurance claims
    
    
    4,456,000
    
    
    
    4,647,000Total current liabilities
    
    
    32,908,000
    
    
    
    27,610,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    10,399,000
    
    
    
    10,843,000DEFERRED COMPENSATION LIABILITY
    
    
    11,227,000
    
    
    
    11,626,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
44,673,000 shares issued in 2007 and 43,499,000 in 2006
    
    
    447,000
    
    
    
    435,000Additional paid in capital
    
    
    74,734,000
    
    
    
    58,664,000Retained earnings
    
    
    133,931,000
    
    
    
    124,268,000Common stock in treasury, at cost, 2,121,000 shares in 2007 and
2,276,000 in 2006
    
    
    (17,123,000
    )
    
    
    (17,890,000
    )Total stockholders equity
    
    
    191,989,000
    
    
    
    165,477,000TOTAL LIABILITITIES AND STOCKHOLDERS EQUITY
    
    $
    246,523,000
    
    
    $
    215,556,000
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Consolidated Statements of Income  (Unaudited)
 For the Three Months Ended September 30,2007
    
    
    2006Revenues
    
    $
    146,081,000
    
    
    $
    130,083,000Operating costs and expenses:Costs of services provided
    
    
    125,476,000
    
    
    
    112,195,000Selling, general and
administrative
    
    
    9,865,000
    
    
    
    9,280,000Other Income :Investment and interest
    
    
    1,128,000
    
    
    
    1,298,000Income before income taxes
    
    
    11,868,000
    
    
    
    9,906,000Income taxes
    
    
    4,569,000
    
    
    
    3,665,000Net Income
    
    $
    7,299,000
    
    
    $
    6,241,000Basic earnings per Common Share
    
    $
    0.17
    
    
    $
    0.15Diluted earnings per Common Share
    
    $
    0.17
    
    
    $
    0.14Cash dividends per Common Share
    
    $
    0.11
    
    
    $
    0.08Basic weighted average number of
Common Shares outstanding
    
    
    42,606,000
    
    
    
    41,190,000Diluted weighted average number of
Common Shares outstanding
    
    
    43,969,000
    
    
    
    43,140,000
  -3-




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Consolidated Statements of Income  (Unaudited)
 For the Nine Months Ended September 30,2007
    
    
    2006Revenues
    
    $
    429,137,000
    
    
    $
    371,841,000Operating costs and expenses:Costs of services provided
    
    
    365,874,000
    
    
    
    320,220,000Selling, general and
administrative
    
    
    30,481,000
    
    
    
    26,311,000Other Income :Investment and interest
    
    
    3,436,000
    
    
    
    3,617,000Income before income taxes
    
    
    36,218,000
    
    
    
    28,927,000Income taxes
    
    
    13,944,000
    
    
    
    10,703,000Net Income
    
    $
    22,274,000
    
    
    $
    18,224,000Basic earnings per Common Share
    
    $
    0.53
    
    
    $
    0.44Diluted earnings per Common Share
    
    $
    0.51
    
    
    $
    0.42Cash dividends per Common Share
    
    $
    0.30
    
    
    $
    0.22Basic weighted average number of
Common Shares outstanding
    
    
    42,134,000
    
    
    
    41,098,000Diluted weighted average number of
Common Shares outstanding
    
    
    43,783,000
    
    
    
    43,036,000
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Consolidated Statements of Cash Flows
 (Unaudited)For the Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net Income
    
    $
    22,274,000
    
    
    $
    18,224,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    2,249,000
    
    
    
    1,408,000Bad debt provision
    
    
    5,117,000
    
    
    
    725,000Deferred income taxes benefits
    
    
    (155,000
    )
    
    
    (1,460,000
    )Stock-based compensation expense
    
    
    305,000
    
    
    
    227,000Unrealized gain on deferred compensation
fund investments
    
    
    (790,000
    )
    
    
    (544,000
    )Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (17,366,000
    )
    
    
    (8,714,000
    )Prepaid income taxes
    
    
    (2,304,000
    )
    
    
    Inventories and supplies
    
    
    (1,936,000
    )
    
    
    (622,000
    )Notes receivable  long term portion
    
    
    1,814,000
    
    
    
    (301,000
    )Deferred compensation funding
    
    
    (1,128,000
    )
    
    
    (534,000
    )Accounts payable and other accrued expenses
    
    
    (1,222,000
    )
    
    
    (755,000
    )Accrued payroll, accrued and withheld payroll taxes
    
    
    8,041,000
    
    
    
    7,048,000Accrued insurance claims
    
    
    (635,000
    )
    
    
    953,000Deferred compensation liability
    
    
    1,296,000
    
    
    
    2,014,000Income taxes payable
    
    
    (274,000
    )
    
    
    (894,000
    )Prepaid expenses and other assets
    
    
    (315,000
    )
    
    
    (109,000
    )Net cash provided by operating activities
    
    
    14,971,000
    
    
    
    16,666,000Cash flows from investing activities:Disposals of fixed assets
    
    
    510,000
    
    
    
    122,000Additions to property and equipment
    
    
    (1,481,000
    )
    
    
    (1,458,000
    )Cash paid for acquisition
    
    
    (364,000
    )
    
    
    (9,678,000
    )Net cash used in investing activities
    
    
    (1,335,000
    )
    
    
    (11,014,000
    )Cash flows from financing activities:Treasury stock transactions in benefit plans
    
    
    238,000
    
    
    
    (164,000
    )Dividends paid
    
    
    (12,611,000
    )
    
    
    (9,038,000
    )Acquisition of treasury stock
    
    
    
    
    
    
    (8,227,000
    )Repayment of debt assumed in acquisition
    
    
    
    
    
    
    (6,163,000
    )Reissuance of treasury stock pursuant to Dividend
Reinvestment Plan
    
    
    44,000
    
    
    
    31,000Proceeds from the exercise of stock options
    
    
    5,335,000
    
    
    
    2,296,000Tax benefit from equity compensation plans
    
    
    6,406,000
    
    
    
    1,007,000Net cash used in financing activities
    
    
    (588,000
    )
    
    
    (20,258,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,048,000
    
    
    
    (14,606,000
    )Cash and cash equivalents at beginning of the period
    
    
    72,997,000
    
    
    
    91,005,000Cash and cash equivalents at end of the period
    
    $
    86,045,000
    
    
    $
    76,399,000Supplementary Cash Flow Information:Income taxes cash payments, net of refunds
    
    $
    10,617,000
    
    
    $
    11,966,000Reclassification of deferred compensation obligation pursuant
to plan amendment
    
    $
    3,572,000
    
    
    $
    Issuance of 65,000 shares of Common Stock in 2007 and
96,000 shares of Common Stock in 2006 pursuant to
Employee Stock Plans
    
    $
    1,254,000
    
    
    $
    728,000
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For the Nine Months Ended September 30, 2007AdditionalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December 31, 2006
    
    
    43,499,000
    
    
    $
    435,000
    
    
    $
    58,664,000
    
    
    $
    124,268,000
    
    
    
    ($17,890,000
    )
    
    $
    165,477,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,274,000
    
    
    
    
    
    
    
    22,274,000Exercise of stock options and other stock-based compensation,
net of 30,000 shares tendered for payment
    
    
    1,174,000
    
    
    
    12,000
    
    
    
    5,323,000
    
    
    
    
    
    
    
    
    
    
    
    5,335,000Tax benefit arising from equity compensation plans transactions
    
    
    
    
    
    
    
    
    
    
    6,406,000
    
    
    
    
    
    
    
    
    
    
    
    6,406,000Shares purchased and shares sold in employee Deferred
Compensation Plan and other benefit plans (44,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,000
    
    
    
    238,000Shares issued pursuant to Employee Stock Plans (64,000 shares)
    
    
    
    
    
    
    
    
    
    
    745,000
    
    
    
    
    
    
    
    509,000
    
    
    
    1,254,000Cash dividends  $.30 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,611,000
    )
    
    
    
    
    
    
    (12,611,000
    )Shares issued pursuant to Dividend Reinvestment Plan (2,000 shares)
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    20,000
    
    
    
    44,000Reclassification of deferred compensation plan obligation
    
    
    
    
    
    
    
    
    
    
    3,572,000
    
    
    
    
    
    
    
    
    
    
    
    3,572,000Balance, September 30, 2007
    
    
    44,673,000
    
    
    $
    447,000
    
    
    $
    74,734,000
    
    
    $
    133,931,000
    
    
    
    ($17,123,000
    )
    
    $
    191,989,000
  -6-




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1   Basis of Reporting
   Note 2  Three-For-Two Stock Split
  Note 3   Acquisition
   -7-




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Note 4   Goodwill and Other Intangible Assets
   Acquisition
    
    
    Amortization ExpenseAmount
    
    
    3rd Quarter
    
    
    Nine MonthsCustomer Relationships
    
    $
    6,700,000
    
    
    $
    239,000
    
    
    $
    718,000Non-compete Agreements
    
    
    800,000
    
    
    
    25,000
    
    
    
    75,000Total
    
    $
    7,500,000
    
    
    $
    264,000
    
    
    $
    793,000
  Customer
    
    Non-CompetePeriod/Year
    
    Relationships
    
    Agreements
    
    TotalOctober 1 to
December 31, 2007
    
    $
    239,000
    
    
    $
    25,000
    
    
    $
    264,0002008
    
    $
    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
 -8-




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Summit
    
    
    All other
    
    
    TotalGoodwill as of December 31, 2006
    
    $
    12,931,000
    
    
    $
    1,612,000
    
    
    $
    14,543,000Goodwill adjustments during nine month
period ended September 30, 2007(1)
    
    
    364,000
    
    
    
    
    
    
    
    364,000Goodwill as of September 30, 2007
    
    $
    13,295,000
    
    
    $
    1.612,000
    
    
    $
    14,907,000
 
 (1)
    
    Goodwill adjusted during the nine month period relates to professional fees expense
incurred in connection with the Summit acquisition and unrealized income tax benefits previously
recorded by Summit.  Segment
    
    AmountFood
    
    $
    1,382,000Housekeeping
    
    
    13,525,000Total
    
    $
    14,907,000
 Note 5   Other Contingencies
    -9-




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Note 6   Segment Information
 Reportable Operating Segments
    -10-




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Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalQuarter Ended September 30,
2007Revenues
    
    $
    119,360,000
    
    
    $
    28,360,000
    
    
    $
    (1,639,000
    )
    
    $
    146,081,000Income before income
taxes
    
    $
    11,466,000
    
    
    $
    503,000
    
    
    $
    (101,000
    )(1)
    
    $
    11,868,000Quarter Ended September 30,
2006Revenues
    
    $
    105,053,000
    
    
    $
    26,403,000
    
    
    $
    (1,373,000
    )
    
    $
    130,083,000Income before income
taxes
    
    $
    9,282,000
    
    
    $
    795,000
    
    
    $
    (171,000
    )(1)
    
    $
    9,906,000Nine Months Ended Sept 30,
2007Revenues
    
    $
    347,698,000
    
    
    $
    82,087,000
    
    
    $
    (648,000
    )
    
    $
    429,137,000Income before income
taxes
    
    $
    34,105,000
    
    
    $
    2,455,000
    
    
    $
    (342,000
    )(1)
    
    $
    36,218,000Nine Months Ended Sept 30,
2006Revenues
    
    $
    298,203,000
    
    
    $
    74,115,000
    
    
    $
    (477,000
    )
    
    $
    371,841,000Income before income
taxes
    
    $
    28,133,000
    
    
    $
    2,411,000
    
    
    $
    (1,617,000
    )(1)
    
    $
    28,927,000
 
 (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 September 30,2007
    
    
    2006Housekeeping services
    
    $
    82,294,000
    
    
    $
    74,352,000Laundry and linen services
    
    
    35,714,000
    
    
    
    29,382,000Food Services
    
    
    27,581,000
    
    
    
    25,727,000Maintenance services
and Other
    
    
    492,000
    
    
    
    622,000$
    146,081,000
    
    
    $
    130,083,000
 -11-




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For the Nine Months Ended September 30,2007
    
    
    2006Housekeeping services
    
    $
    242,253,000
    
    
    $
    210,699,000Laundry and linen services
    
    
    104,562,000
    
    
    
    86,353,000Food Services
    
    
    80,667,000
    
    
    
    72,937,000Maintenance services and other
    
    
    1,655,000
    
    
    
    1,852,000$
    429,137,000
    
    
    $
    371,841,000
 Major Client
  2007
    
    2007Nine months
    
    3rd quarterTotal revenues
    
    
    16
    %
    
    
    16
    %Housekeeping
    
    
    15
    %
    
    
    15
    %Food
    
    
    22
    %
    
    
    21
    %
 2006
    
    2006Nine months
    
    3rd quarterTotal revenues
    
    
    19
    %
    
    
    18
    %Housekeeping
    
    
    17
    %
    
    
    16
    %Food
    
    
    26
    %
    
    
    25
    %
 .
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Note 7   Earnings Per Common Share
  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
 Quarter Ended September 30, 2006Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    6,241,000Basic earnings per
common share
    
    $
    6,241,000
    
    
    
    41,190,000
    
    
    $
    .15Effect of dilutive securities:Options
    
    
    
    
    
    
    1,950,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    6,241,000
    
    
    
    43,140,000
    
    
    $
    .14
 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
 Nine Months Ended September 30, 2006Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    18,224,000Basic earnings per
common share
    
    $
    18,224,000
    
    
    
    41,098,000
    
    
    $
    .44Effect of dilutive securities:Options
    
    
    
    
    
    
    1,289,000
    
    
    
    (.02
    )Diluted earnings per
common share
    
    $
    18,224,000
    
    
    
    43,036,000
    
    
    $
    .42
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##### Table of Contents



Note 8  Dividends
  1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .09
    
    
    $
    .10
    
    
    $
    .11Total cash dividends paid
    
    $
    3,886,000
    
    
    $
    4,186,000
    
    
    $
    4,539,000Record date
    
    February 5
    
    April 27
    
    July 27, 2007Payment date
    
    February 14
    
    May 11
    
    August 10, 2007
   Note 9  Share-Based Compensation
  Weighted AverageRemainingContractual
    
    
    AggregateWeighted Average
    
    
    Number
    
    
    Life
    
    
    IntrinsicPrice
    
    
    of Shares
    
    
    (In Years)
    
    
    ValueOutstanding, January 1, 2007
    
    $
    5.80
    
    
    
    3,651,000Granted
    
    
    
    
    
    
    Cancelled
    
    
    8.51
    
    
    
    (1,000
    )Exercised
    
    
    4.64
    
    
    
    (1,197,000
    )Outstanding and exercisable at
September 30, 2007
    
    $
    6.36
    
    
    
    2,453,000
    
    
    
    4.89
    
    
    $
    34,115,000
  -14-




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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
    
    
    718,000
    
    
    
    3.34
    
    
    $
    2.48
    
    
    
    718,000
    
    
    $
    2.48$3.01  3.75
    
    
    384,000
    
    
    
    5.11
    
    
    
    3.64
    
    
    
    384,000
    
    
    
    3.64$5.53  5.53
    
    
    506,000
    
    
    
    6.24
    
    
    
    5.53
    
    
    
    506,000
    
    
    
    5.53$9.10  9.10
    
    
    431,000
    
    
    
    7.24
    
    
    
    9.10
    
    
    
    431,000
    
    
    
    9.10$13.81  13.81
    
    
    414,000
    
    
    
    3.25
    
    
    
    13.81
    
    
    
    414,000
    
    
    
    13.812,453,000
    
    
    
    4.89
    
    
    $
    6.36
    
    
    
    2,453,000
    
    
    $
    6.36
  September
    
    
    September30, 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:
    
    $
    17,532,000
    
    
    $
    2,924,000
    2007
    
    2006Quarter
    
    Nine Months
    
    Quarter
    
    Nine MonthsPre-tax shared-based compensation expense
    
    $
    5,000
    
    
    $
    197,000
    
    
    $
    111,000
    
    
    $
    227,000Risk-free interest rate
    
    
    3.8
    %
    
    
    3.8
    %
    
    
    4.6
    %
    
    
    4.6
    %Expected volatility
    
    
    36.0
    %
    
    
    36.0
    %
    
    
    34.5
    %
    
    
    34.5
    %Weighted average expected life (in years)
    
    
    .25
    
    
    
    .25
    
    
    
    .25
    
    
    
    .25Dividend yield
    
    
    2.1
    %
    
    
    2.1
    %
    
    
    2.0
    %
    
    
    2.0
    %
 -15-




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Note 10  Related Party Transactions
   Note 11  Cumulative Effect of Adjustment to Deferred Compensation Liability
  -16-




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##### Table of Contents



Note 12  Income Taxes
    -17-




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##### Table of Contents



Note 13  Recently Issued Accounting Pronouncements
   -18-




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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
   -19-




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##### Table of Contents



RESULTS OF OPERATIONS
    Overview
  -20-




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##### Table of Contents



Consolidated Operations
  Relation to Consolidated RevenuesFor the Quarter Ended September 30,
    
    For the Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    85.9
    
    
    
    86.3
    
    
    
    85.3
    
    
    
    86.1Selling, general and administration
    
    
    6.8
    
    
    
    7.1
    
    
    
    7.1
    
    
    
    7.1Investment and interest income
    
    
    .8
    
    
    
    1.0
    
    
    
    .8
    
    
    
    1.0Income before income taxes
    
    
    8.1
    
    
    
    7.6
    
    
    
    8.4
    
    
    
    7.8Income taxes
    
    
    3.1
    
    
    
    2.8
    
    
    
    3.2
    
    
    
    2.9Net income
    
    
    5.0
    %
    
    
    4.8
    %
    
    
    5.2
    %
    
    
    4.9
    %
 -21-




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##### Table of Contents



2007 Third Quarter Compared with 2006 Third Quarter
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr (decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incr(decr)Revenues
    
    $
    146,081,000
    
    
    
    12.3
    %
    
    $
    (1,640,000
    )
    
    $
    119,360,000
    
    
    
    13.6
    %
    
    $
    28,361,000
    
    
    
    7.4
    %Cost of services provided
    
    
    125,476,000
    
    
    
    11.8
    
    
    
    (10,276,000
    )
    
    
    107,894,000
    
    
    
    12.7
    
    
    
    27,858,000
    
    
    
    8.8
    %Selling, general and
administrative expense
    
    
    9,865,000
    
    
    
    6.3
    
    
    
    9,865,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    1,128,000
    
    
    
    (13.1
    )
    
    
    1,128,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    11,868,000
    
    
    
    19.8
    %
    
    
    (101,000
    )
    
    $
    11,466,000
    
    
    
    23.5
    %
    
    $
    503,000
    
    
    
    (36.7
    )%
 Revenues
 Consolidated
  .
 -22-




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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
    
    
    1.6
    
    
    
    .1
    
    
    
    1.5Workers compensation and general
liability insurance
    
    
    3.2
    
    
    
    3.4
    
    
    
    (.2
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.4
    
    
    
    81.6
    
    
    
    (.2
    )Housekeeping supplies
    
    
    4.9
    
    
    
    5.6
    
    
    
    (.7
    )Food labor and other labor costs
    
    
    55.2
    
    
    
    54.7
    
    
    
    .5Food supplies
    
    
    37.2
    
    
    
    37.4
    
    
    
    (.2
    )
  -23-




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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
  -24-




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##### Table of Contents



Consolidated Net Income
  2007 Nine Month Period Compared with 2006 Nine Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    incr(decr)
    
    eliminations
    
    Amount
    
    %incr
    
    Amount
    
    %incrRevenues
    
    $
    429,137,000
    
    
    
    15.4
    %
    
    $
    (648,000
    )
    
    $
    347,698,000
    
    
    
    16.6
    %
    
    $
    82,087,000
    
    
    
    10.8
    %Cost of services provided
    
    
    365,874,000
    
    
    
    14.3
    
    
    
    (27,351,000
    )
    
    
    313,593,000
    
    
    
    16.1
    
    
    
    79,632,000
    
    
    
    11.1Selling, general and
administrative expense
    
    
    30,481,000
    
    
    
    15.8
    
    
    
    30,481,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    3,436,000
    
    
    
    (5.0
    )
    
    
    3,436,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    36,218,000
    
    
    
    25.2
    %
    
    
    (342,000
    )
    
    $
    34,105,000
    
    
    
    21.2
    %
    
    $
    2,455,000
    
    
    
    1.8
    %
 Revenues
 Consolidated
   Reportable Segments
    -25-




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##### Table of Contents



Costs of services provided
 Consolidated
  Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    Incr (Decr)%Bad debt provision
    
    
    1.2
    
    
    
    .2
    
    
    
    1.0Workers compensation and general
liability insurance
    
    
    3.2
    
    
    
    3.7
    
    
    
    (.5
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2007 %
    
    2006 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.4
    
    
    
    81.4
    
    
    
    Housekeeping supplies
    
    
    5.1
    
    
    
    5.5
    
    
    
    (.4
    )Food labor and other labor costs
    
    
    54.8
    
    
    
    54.5
    
    
    
    .3Food supplies
    
    
    36.4
    
    
    
    37.4
    
    
    
    (1.0
    )
   Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
 -26-




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##### Table of Contents



Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -27-




---



##### Table of Contents



Critical Accounting Policies and Estimates
    Allowance for Doubtful Accounts
    -28-




---



##### Table of Contents



Aggregate AccountBalances of Clientsin Bankruptcy orIn/Pending
    
    Net Write-Offs
    
    Bad Debt
    
    Allowance forPeriod Ended
    
    Collection/Litigation
    
    of Client Accounts
    
    Provision
    
    Doubtful AccountsSeptember
30, 2007
    
    $
    7,540,000
    
    
    $
    4,421,000
    
    
    $
    5,117,000
    
    
    $
    3,412,000December
31, 2006
    
    $
    6,098,000
    
    
    $
    181,000
    
    
    $
    622,000
    
    
    $
    2,716,000
   -29-




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##### Table of Contents



Accrued Insurance Claims
    Asset Valuations and Review for Potential Impairment
  -30-




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
  Investing Activities
  Financing Activities
  1st Quarter
    
    2nd Quarter
    
    3rd QuarterCash dividend per common share
    
    $
    .09
    
    
    $
    .10
    
    
    $
    .11Total cash dividends paid
    
    $
    3,886,000
    
    
    $
    4,186,000
    
    
    $
    4,539,000Record date
    
    February 5
    
    April 27
    
    July 27Payment date
    
    February 14
    
    May 11
    
    August 10
  -31-




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##### Table of Contents



Reclassification of Deferred Compensation Plan Obligation
  Line of Credit
   Covenant Description and Requirement
    
    Status at September 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 3.1Tangible net worth: must exceed $136,000,000.
    
    Tangible net worth is $170,727,000
  Accounts and Notes Receivable
 -32-




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##### Table of Contents



-33-




---



##### Table of Contents



Insurance Programs
     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
  
 ITEM 3 Defaults under Senior Securities.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders
 
 ITEM 5. Other Information.
 a)
    
    None
 
 ITEM 6. Exhibits
 a)
    
    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.October 22, 2007
Date
    
    /s/ Daniel P. McCartney

DANIEL P. McCARTNEY, Chief
Executive OfficerOctober 22, 2007
Date
    
    /s/ Thomas A. Cook

THOMAS A. COOK, President and
Chief Operating OfficerOctober 22, 2007
Date
    
    /s/ Richard W. Hudson

RICHARD W. HUDSON, Chief
Financial Officer and Secretary
 -37-