##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)For the transition period
    from          to   Commission file number. 0-12015
        HEALTHCARE SERVICES GROUP,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Pennsylvania

23-2018365(State or other jurisdiction
    of
    incorporated or organization)

(IRS Employer Identification
    No.)3220 Tillman Drive,
    Suite 300,Bensalem, PA

19020(Address of principal executive
    offices)

(Zip Code)   Registrants telephone number, including area code:
 (215) 639-4274
  Securities registered pursuant to Section 12(b) of the
    Act:
 NONE
  Securities registered pursuant to Section 12(g) of the
    Act:
  Common Stock ($.01 par value)

NASDAQ National MarketTitle of Class

Name of each exchange on which
    securities registered   o þ
  o þ
  þ o
  Regulation S-K Form 10-K - þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
    27,621,000
  DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### Table of Contents



Part I
    Item I.Business.
  (a)  General
     (b)  Segment
    Information
 Form 10-K
  (c)  Description
    of Services
  General
          1




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90-day
     2




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##### Table of Contents



Housekeeping
 Housekeeping
    services. on-site on-site on-site
  Laundry and linen
    services.
    Maintenance and
    other services.
  Laundry installation
    sales.
  Food
 Food
    services. On-site
 3




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##### Table of Contents



Operational
    Management Structure
   
  on-site on-site
  Market
 not-for-profit,
 4




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##### Table of Contents



Marketing and
    Sales
   on-site
  Government
    Regulation of Clients
        5




---



##### Table of Contents



and/or
  Service
    Agreements/Collections
 on-site
  90-day
  time-to-time
  Schedule II-Valuation
  Competition
  6




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##### Table of Contents



Employees
 on-site
    (d)  Financial
    Information About Geographic Areas
   (e)  Available
    Information
 1-800-SEC-0330.
  Website
    Access
 www.hcsgcorp.com
 7




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##### Table of Contents



Item 1A.  Risk
    Factors.
     We have one
    client, a nursing home chain, which due to its significant
    contribution to our total revenues, we consider a major
    client.
   Although we
    expect that the acquisition of Summit will result in benefits to
    our company, those benefits may not occur, or may be delayed,
    because of integration and other challenges associated with the
    acquisition.
   
    potential loss of key employees and management.
    integration of acquired personnel into our culture and
    philosophies.
    diversion of management focus and attention.
    assumption of liabilities and potentially unknown liabilities
    including past failures to comply with healthcare or other
    authorities regulations.
    potential loss of clients acquired through the acquisition due
    to changes in management of Summit or if our operations do not
    meet the financial or service expectations of such clients.  Our clients are
    concentrated in the health care industry.
  8




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##### Table of Contents



We have a Paid
    Loss Retrospective Insurance Plan for general liability and
    workers compensation insurance.
 and/or
  We provide
    services in 47 states and are subject to numerous local
    taxing jurisdictions within those states.
   We primarily
    provide our services pursuant to agreements which have a one
    year term, cancelable by either party upon 30 to
    90 days notice after the initial
    90-day
    service agreement period.
 start-up
  We are dependent
    on the management experience of our key personnel.
 on-site
  We may in general
    be adversely affected by inflationary or market fluctuations in
    the cost of products consumed in providing our services or our
    cost of labor
   Market
    expectations are high and rely greatly on execution of our
    growth strategy and related increases in financial
    performance.
  9




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##### Table of Contents



Item 1B.  Unresolved
    Staff Comments.
   Item 2.  Properties.
           Item 3.  Legal
    Proceedings.
 and/or
  Item 4.  Submission
    of Matters to a Vote of Security Holders.
  10




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##### Table of Contents



PART II
  Item 5.
    Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities. (a)  Market
    Information
     2006 High


2006 Low1st Qtr.


$21.60



$18.212nd Qtr.


$22.52



$19.023rd Qtr.


$25.53



$19.294th Qtr.


$29.14



$24.77   2005 High


2005 Low1st Qtr.


$16.53



$12.542nd Qtr.


$20.65



$14.173rd Qtr.


$21.60



$15.774th Qtr.


$21.45



$17.01   (b)  Holders
   (c)  Dividends
     Cash Dividend

Payment Date

Record Date1st Quarter

$.10

February 13

February 32nd Quarter

$.11

May 10

April 283rd Quarter

$.12

August 11

July 284th Quarter

$.13

November 10

October 27     three-for-two
   11




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##### Table of Contents



(d)  Securities
    Authorized for Issuance Under Equity Compensation Plans
   Number of SecuritiesNumber of Securities to be

Weighted-Average

Remaining Available for FutureIssued Upon Exercise of

Exercise Price of

Issuance Under EquityOutstanding Options,

Outstanding Options,

Compensation Plans (ExcludingWarrants and Rights

Warrants and Rights

Securities Reflected in Column (a))Plan Category

(a)

(b)

(c)Equity compensation plans approved
    by security holders

2,433,0001

$8.70

3,419,0002Equity compensation plans not
    approved by security holders

N/A

N/A

N/ATotal

2,433,000

$8.70

3,419,000     1
    
    Represents shares of Common Stock issuable upon exercise of
    outstanding options granted under either the 2002 Plan, the 1996
    Plan, or the 1995 Incentive and Non-qualified Stock Option Plan
    (the Stock Option Plans).2
    
    Includes options to purchase 1,809,000 shares available for
    future grant under the Companys Stock Option Plans. Also
    includes 1,335,000 and 275,000 shares available for
    issuance under the Companys 1999 Employee Stock Purchase
    Plan and 1999 Deferred Compensation Plan, respectively
    (collectively, the 1999 Plans). Treasury shares may
    be issued under the 1999 Plans. 12




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(e) Performance
    Graph
  Comparison of
    5 Year Cumulative Total Return*
 Among Healthcare
    Services Group, Inc., The S & P 500 Index
    And The S & P Health Care Distributors Index
  
  *
    $100 invested on 12/31/01 in stock or index-including
    reinvestment of dividends. Fiscal year ending December 31.
  Copyright
    ©
    2007, Standard & Poors, a division of The McGraw-Hill
    Companies, Inc. All rights reserved.
    www.researchdatagroup.com/S&P.htm
  Recent sales of
    Unregistered Securities
    Purchases of
    Equity Securities by the Issuer and Affiliated
    Purchasers
   13




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##### Table of Contents



Item 6.  Selected
    Financial Data.
  Form 10-K
  (in thousands except for per share data)Years Ended December 31:

2006

2005

2004

2003

2002Selected Operating
    Results:Total revenue

$
511,631


$
466,291


$
442,568


$
379,718


$
328,500Net income

$
25,452


$
19,096


$
14,699


$
10,860


$
8,631Basic earnings per Common Share

$
.93


$
.71


$
.56


$
.42


$
.34Diluted earnings per Common Share

$
.89


$
.67


$
.53


$
.41


$
.33Selected Balance Sheet
    Data:Total assets

$
215,556


$
188,430


$
166,964


$
158,328


$
134,296Stockholders equity

$
165,477


$
148,163


$
131,460


$
121,198


$
107,881Selected Other Financial
    Data:Working capital

$
140,627


$
142,535


$
125,012


$
112,073


$
96,117Cash dividends per common share

$
.46


$
.30


$
.17


$
.06


$
Weighted average number of common
    shares outstanding for basic EPS


27,451



26,921



26,221



25,574



25,342Weighted average number of common
    shares outstanding for diluted EPS


28,765



28,320



27,660



26,682



26,301   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation.  Cautionary
    Statement Regarding Forward Looking Statements
   14




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##### Table of Contents



Results of
    Operations
     No. 97-14 No. 97-14),
  Overview
  15




---



##### Table of Contents



90-day
          Consolidated
    Operations
   Relation to Consolidated RevenuesYears Ended December 31,2006


2005


2004Revenues


100.0
%


100.0
%


100.0
%Operating costs and expenses:Costs of services provided


85.7



87.1



87.8Selling, general and administration


7.3



7.0



7.1Investment and interest income


1.0



.7



.3Income before income taxes


8.0



6.6



5.4Income taxes


3.0



2.5



2.0Net income


5.0
%


4.1
%


3.4
%      16




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##### Table of Contents



2006 Compared with
    2005
   Reportable SegmentsHousekeeping

FoodPercent

Corporate andConsolidated

increase

eliminations

Amount

%incr

Amount

%incrRevenues

$
511,631,000



9.7
%

$
(2,019,000
)

$
412,271,000



9.9
%

$
101,379,000



9.2
%Cost of services provided


438,617,000



8.0



(33,778,000
)


374,414,000



9.1



97,981,000



8.6Selling, general and administrative


37,196,000



14.2



37,196,000











Income before income taxes


40,723,000



32.2



(532,000
)


37,857,000



18.6



3,398,000



29.0   Revenues
  Consolidated
   .
  Reportable
    Segments
       Costs of
    services provided
  Consolidated
  17




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##### Table of Contents



Cost of Services Provided-Key
    Indicators

2006%

2005%

(Decr)%Bad debt provision



.1



.3

(.2)Workers compensation and
    general liability insurance


3
.5


3
.9

(.4)     Reportable
    Segments
     Cost of Services Provided-Key
    Indicators

2006%

2005%

Incr (Decr)%Housekeeping labor and other labor
    costs


81
.6


82
.4


(
.8)Housekeeping segment supplies


5
.6


5
.5



.1Food labor and other labor costs


54
.3


54
.9


(
.6)Food segment supplies


37
.4


38
.6


(1
.2)       Consolidated
    Selling, General and Administrative Expense
   Consolidated
    Investment and Interest Income
   Income before
    Income Taxes
  Consolidated
  18




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##### Table of Contents



Reportable
    Segments
     Consolidated
    Income Taxes
   Consolidated Net
    Income
   2005 Compared with
    2004
   Reportable SegmentsHousekeeping

FoodPercent

Corporate andConsolidated

increase

eliminations

Amount

%incr

Amount

%incrRevenues

$
466,291,000



5.4
%

$
(1,706,000
)

$
375,133,000



4.9
%

$
92,864,000


6.4%Cost of services provided


406,114,000



4.5



(27,340,000
)


343,224,000



4.5



90,230,000


5.7Selling, general and administrative


32,576,000



3.3



32,576,000











Income before income taxes


30,799,000



29.9



(3,744,000
)


31,909,000



8.8



2,634,000


36.2   Revenues
  Consolidated
     Reportable
    Segments
      19




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##### Table of Contents



Costs of
    services provided
  Consolidated
   Cost of Services Provided-Key
    Indicators

2005%

2004%

(Decr)%Bad debt provision


.3



.8



(.5
)Workers compensation and
    general liability insurance


3.9



4.0



(.1
)     Reportable Segments
      Cost of Services Provided-Key
    Indicators

2005%

2004%

Incr (Decr)%Housekeeping labor and other labor
    costs


82.4



82.7



(.3
)Housekeeping segment supplies


5.5



5.2



.3Food labor and other labor costs


54.9



54.9



Food segment supplies


38.6



38.7



(.1
)       Consolidated
    Selling, General and Administrative Expense
   Income before
    Income Taxes
  Consolidated
   Reportable Segments
   20




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##### Table of Contents



Consolidated
    Investment and Interest Income
   Consolidated
    Income Taxes
   Consolidated Net
    Income
   Critical
    Accounting Policies and Estimates
     Form 10-K,
  Allowance for
    Doubtful Accounts
    21




---



##### Table of Contents



and/or
      Aggregate AccountBalances of Clientsin Bankruptcy orin/or Pending

Net Write-Offs

Bad Debt

Allowance forYear Ending

Collection/Litigation

of Client Accounts

Provision

Doubtful Accounts2004

$
4,255,000


$
5,245,000


$
3,700,000


$
1,869,0002005


2,960,000



1,019,000



1,425,000



2,275,0002006


6,098,000



181,000



622,000



2,716,000     Form 10-K
  Accrued
    Insurance Claims
   22




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##### Table of Contents



Asset
    Valuations and Review for Potential Impairment
   Liquidity and
    Capital Resources
   Operating
    Activities
   Investing
    Activities
   Financing
    Activities
   23




---



##### Table of Contents



1st Quarter

2nd Quarter

3rd Quarter

4th QuarterCash dividend per common share

$      .10

$      .11

$      .12

$      .13Total cash dividends paid

$2,730,000

$3,015,000

$3,293,000

$3,589,000Record date

February 3

April 28

July 28

October 27Payment date

February 13

May 10

August 11

November 10           Line of
    Credit
     Covenant Description and
    Requirement

Status at December 31, 2006Commitment coverage ratio: cash
    and cash equivalents must
    equal or exceed outstanding obligations under the line of
    credit by a multiple of 2.

Commitment coverage is 2.6Tangible net worth: must exceed
    $125,000,000.

Tangible net worth is $144,000,000     Accounts and
    Notes Receivable
 agreed-upon
 24




---



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Insurance
    Programs
         Capital
    Expenditures
  25




---



##### Table of Contents



Material
    Off-Balance Sheet Arrangements
  26




---



##### 



Effects of
    Inflation
   Item 7A.  Quantitative
    and Qualitative Disclosures About Market Risk.
   Item 8.  Financial
    Statements and Supplementary Data.
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  
 PageReport of
    Independent Registered Public Accounting Firm

28Managements
    Report on Internal Control Over Financial Reporting

29Report of
    Independent Registered Public Accounting Firm on Internal
    Control Over Financial Reporting

30Consolidated Financial
    StatementsConsolidated
    Balance Sheets as of December 31, 2006 and 2005

31Consolidated
    Statements of Income for the Years Ended December 31, 2006,
    2005 and 2004

32Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2006, 2005 and 2004

33Consolidated
    Statement of Changes in Stockholders Equity for the years
    Ended December 31, 2006, 2005 and 2004

34Notes to
    Consolidated Financial Statements for the Years Ended
    December 31, 2006, 2005 and 2004

35Consent of Grant Thornton LLPCertification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a)Certification of CEO Pursuant to 18 U.S.C. Section 1350Certification of CFO Pursuant 10 18 U.S.C. Section 1350   27




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm               
    28




---



##### Table of Contents



Managements
    Annual Report on Internal Control Over Financial
    Reporting  Rule 13a-15(f) 15d-15(f)
                Signatures

(Signature)Daniel P. McCartney
    Chief Executive Officer
    February 13, 2007

James L. DiStefano
    Chief Financial Officer
    February 13, 2007  29




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                 
    30




---



##### Table of Contents



Consolidated
    Balance Sheets  December 31,2006


2005AssetsCurrent Assets:Cash and cash equivalents

$
72,997,000


$
91,005,000Accounts and notes receivable, less
    allowance for doubtful accounts of $2,716,000 in 2006 and
    $2,275,000 in 2005


78,086,000



59,197,000Inventories and supplies


12,640,000



11,729,000Deferred income taxes


652,000



355,000Prepaid expenses and other


3,862,000



3,330,000Total current assets


168,237,000



165,616,000Property and
    Equipment:Laundry and linen equipment
    installations


1,781,000



2,416,000Housekeeping equipment and office
    furniture


16,086,000



15,141,000Autos and trucks


85,000



79,00017,952,000



17,636,000Less accumulated depreciation


13,077,000



12,892,0004,875,000



4,744,000GOODWILL Less accumulated
    amortization of $1,743,000 in 2006 and 2005


14,543,000



1,612,000OTHER INTANGIBLE ASSETS Less
    accumulated amortization of $352,000


7,148,000



NOTES RECEIVABLElong
    term portion, net of discount


7,861,000



4,555,000DEFERRED COMPENSATION FUNDING


7,385,000



5,626,000DEFERRED INCOME TAXESlong
    term portion


5,403,000



6,181,000OTHER NONCURRENT ASSETS


104,000



96,000TOTAL ASSETS

$
215,556,000


$
188,430,000Liabilities and
    Stockholders EquityCurrent Liabilities:Accounts payable

$
10,139,000


$
8,760,000Accrued payroll, accrued and
    withheld payroll taxes


10,125,000



7,792,000Other accrued expenses


2,425,000



657,000Income taxes payable


274,000



1,467,000Accrued insurance claims


4,647,000



4,405,000Total current
    liabilities


27,610,000



23,081,000ACCRUED INSURANCE CLAIMSlong
    term portion


10,843,000



10,277,000DEFERRED COMPENSATION LIABILITY


11,626,000



6,909,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $ .01 par value,
    30,000,000 shares authorized, 28,999,000 shares
    issued in 2006 and 28,677,000 in 2005


290,000



287,000Additional paid-in capital


58,809,000



48,603,000Retained earnings


124,268,000



112,299,000Common stock in treasury, at cost,
    1,517,000 shares in 2006 and 1,616,000 shares
    in 2005


(17,890,000
)


(13,026,000
)Total Stockholders
    Equity


165,477,000



148,163,000TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
215,556,000


$
188,430,000    31




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##### Table of Contents



Consolidated
    Statements of Income  Years Ended December 31,2006


2005


2004Revenues

$
511,631,000


$
466,291,000


$
442,568,000Operating costs and expenses:Cost of services provided


438,617,000



406,114,000



388,668,000Selling, general and administrative


37,196,000



32,576,000



31,523,000Other income:Investment and interest


4,905,000



3,198,000



1,329,000Income before income taxes


40,723,000



30,799,000



23,706,000Income taxes


15,271,000



11,703,000



9,007,000Net Income

$
25,452,000


$
19,096,000


$
14,699,000Basic earnings per Common Share

$
.93


$
.71


$
.56Diluted earnings per Common Share

$
.89


$
.67


$
.53Cash dividends per common share

$
.46


$
.30


$
.17Basic weighted average number of
    common shares outstanding


27,451,000



26,921,000



26,221,000Diluted weighted average number of
    common shares outstanding


28,765,000



28,320,000



27,660,000    32




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##### Table of Contents



Consolidated
    Statements of Cash Flows  Years Ended December 31,2006


2005


2004Cash flows from operating
    activities:Net Income

$
25,452,000


$
19,096,000


$
14,699,000Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


2,306,000



1,872,000



1,873,000Bad debt provision


622,000



1,425,000



3,700,000Deferred income taxes benefits


(1,386,000
)


(399,000
)


(986,000
)Stock-based compensation expense


481,000



35,000



Tax benefit of stock option
    transactions






3,454,000



1,900,000Unrealized gain on deferred
    compensation fund investments


(976,000
)


(705,000
)


(336,000
)Changes in operating assets and
    liabilities:Accounts and notes receivable


(9,422,000
)


(4,897,000
)


(1,279,000
)Inventories and supplies


(840,000
)


(714,000
)


(560,000
)Notes receivablelong term
    portion


(3,306,000
)


1,002,000



2,347,000Deferred compensation funding


(783,000
)


(859,000
)


(879,000
)Accounts payable and other accrued
    expenses


(774,000
)


453,000



1,553,000Accrued payroll, accrued and
    withheld payroll taxes


1,890,000



2,324,000



(7,651,000
)Accrued insurance claims


413,000



285,000



2,481,000Deferred compensation liability


3,285,000



1,892,000



1,521,000Income taxes payable


(896,000
)


452,000



837,000Prepaid expenses and other assets


54,000



(221,000
)


215,000
)Net cash provided by operating
    activities


16,120,000



24,495,000



19,435,000Cash flows from investing
    activities:Disposals of fixed assets


151,000



85,000



321,000Additions to property and equipment


(1,854,000
)


(1,897,000
)


(2,387,000
)Cash paid for acquisition


(9,736,000
)






Net cash used in investing
    activities


(11,439,000
)


(1,812,000
)


(2,066,000
)Cash flows from financing
    activities:Treasury stock transactions in
    benefit plans


(261,000
)


(173,000
)


Acquisition of treasury stock


(8,227,000
)


(3,857,000
)


(6,026,000
)Dividends paid


(12,627,000
)


(8,076,000
)


(4,598,000
)Reissuance of treasury stock
    pursuant to Dividend Reinvestment Plan


44,000



32,000



11,000Repayment of debt assumed in
    acquisition


(6,163,000
)






Tax benefit from equity
    compensation plans


1,247,000







Proceeds from the exercise of stock
    options


3,298,000



5,549,000



3,910,000Net cash used in financing
    activities


(22,689,000
)


(6,525,000
)


(6,703,000
)Net increase (decrease) in cash and
    cash equivalents


(18,008,000
)


16,158,000



10,666,000Cash and cash equivalents at
    beginning of the year


91,005,000



74,847,000



64,181,000Cash and cash equivalents at end of
    the year

$
72,997,000


$
91,005,000


$
74,847,000Supplementary Cash Flow Information:Issuance of 64,000, 90,000, and
    72,000 shares of Common Stock in 2006, 2005 and 2004,
    respectively, pursuant to Employee Stock Plans

$
728,000


$
643,000


$
366,000Issuance of 369,000 shares of
    Common Stock related to acquisition

$
8,516,000


$



$
   33




---



##### Table of Contents



Consolidated
    Statements of Stockholders Equity  Years Ended December 31, 2006, 2005 and 2004Additional


TotalCommon Stock


Paid-in


Retained


Treasury


StockholdersShares


Amount


Capital


Earnings


Stock


EquityBalance, December 31, 2003


26,909,000


$
269,000


$
33,426,000


$
91,178,000


$
(3,675,000
)

$
121,198,000Net income for the year














14,699,000







14,699,000Exercise of stock options and other
    share-based compensation


852,000



8,000



3,948,000







(46,000
)


3,910,000Tax benefit arising from stock
    option transactions










1,900,000











1,900,000Acquisition of treasury stock
    (579,000 shares)


















(6,026,000
)


(6,026,000
)Shares issued pursuant to Employee
    Stock Plans (72,000 shares)










94,000







272,000



366,000Cash dividends$.17 per
    common share














(4,598,000
)






(4,598,000
)Shares issued pursuant to Dividend
    Reinvestment Plan (792 shares)










6,000







5,000



11,000Balance, December 31, 2004


27,761,000



277,000



39,374,000



101,279,000



(9,470,000
)


131,460,000Net income for the year














19,096,000







19,096,000Exercise of stock options and other
    share-based compensation, net of 14,000 shares tendered for
    payment


900,000



9,000



5,575,000











5,584,000Tax benefit arising from stock
    option transactions










3,454,000











3,454,000Acquisition of treasury stock
    (579,000 shares)


















(6,026,000
)


(6,026,000
)Shares purchased and shares sold in
    employee Deferred Compensation Plan and other benefit plans
    (17,000 shares)


















(173,000
)


(173,000
)Shares issued pursuant to Employee
    Stock Plans (90,000 shares)


16,000



1,000



181,000







461,000



643,000Cash dividends$.30 per
    common share














(8,076,000
)






(8,076,000
)Shares issued pursuant to Dividend
    Reinvestment Plan (2,000 shares)










19,000







13,000



32,000Balance, December 31, 2005


28,677,000



287,000



48,603,000



112,299,000



(13,026,000
)


148,163,000Cumulative effect adjustment (See
    Note 13)














(856,000
)Net income for the year














25,452,000







24,596,000Exercise of stock options and other
    stock-based compensation, net of 4,000 shares tendered for
    payment


322,000



3,000



3,295,000











3,298,000Tax benefit arising from stock
    option transactions










1,247,000











1,247,000Shares issued pursuant to
    acquisition (369,000 shares)










5,429,000







3,087,000



8,516,000Acquisition of treasury stock
    (335,000 shares)


















(8,227,000
)


(8,227,000
)Shares purchased and shares sold in
    employee Deferred Compensation Plan and other benefit plans
    (1,000 shares)


















(261,000
)


(261,000
)Shares issued pursuant to Employee
    Stock Plans (64,000 shares)










210,000







518,000



728,000Cash dividends$.46 per
    common share














(12,627,000
)






(12,627,000
)Shares issued pursuant to Dividend
    Reinvestment Plan (2,000 shares)










25,000







19,000



44,000Balance, December 31, 2006


28,999,000


$
290,000


$
58,809,000


$
124,268,000



(17,890,000
)

$
165,477,000    34




---



##### Table of Contents



Notes to
    Consolidated Financial Statements  Note 1Summary
    of Significant Accounting Policies
  Nature of
    Operations
   90-day
          Principles of
    Consolidation
   Cash and Cash
    Equivalents
   Inventories and
    Supplies
 first-in,
  Property and
    Equipment
  35




---



##### Table of Contents



Revenue
    Recognition
     Income
    Taxes
     Earnings per
    Common Share
   Share-Based
    Compensation
  36




---



##### Table of Contents



Advertising
    Costs
   Impairment of
    Long-Lived Assets
   Identifiable
    Intangible Assets and Goodwill
       Treasury
    Stock
   Three-for-Two
    Stock Splits
 three-for-two three-for-two three-for-two
  Reclassification
   Use of Estimates
    in Financial Statements
  37




---



##### Table of Contents



Concentrations of
    Credit Risk
     Major
    Client
   Reportable Segments Revenues


Amounts due at December 31,Total Revenues


Housekeeping


Food


% of accounts receivable balance2006


18%



16%



26%



less than 1%2005


19%



18%



27%



less than 1%2004


20%



19%



27%



less than 1%     Fair Value of
    Financial Instruments
    38




---



##### Table of Contents



Recent Accounting
    Pronouncements
         Note 2Acquisition
     39




---



##### Table of Contents



Accounts and notes receivable, net

$
10,441,000Other assets


312,000Fixed assets


382,000Identifiable Intangible Assets


7,500,000Goodwill


12,932,000Total assets acquired


31,567,000Accounts payable, accrued expenses
    and other liabilities


(13,315,000
)Net assets acquired

$
18,252,000     Customer


Non-CompeteYear

Relationships


Agreements


Total2007

$
957,000


$
100,000


$
1,057,0002008

$
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     Income Before


2006Segment

Revenues


Income Taxes


AmortizationHousekeeping

$
14,719,000


$
2,324,000


$
316,000Food

$
1,189,000


$
248,000


$
36,000     Note 3Allowance
    for Doubtful Accounts
  40




---



##### Table of Contents



Impaired
    Notes Receivable
       Impaired Notes ReceivableBalance








BalanceBeginning








End ofof Year


Additions


Deductions


Year2006

$
2,500,000


$



$
2,300,000


$
200,0002005

$
2,500,000


$
60,000


$
60,000


$
2,500,0002004

$
3,900,000


$
1,600,000


$
3,000,000


$
2,500,000   Reserve for Impaired Notes ReceivableBalance








BalanceBeginning








End ofof Year


Additions


Deductions


Year2006

$
1,300,000


$



$
1,100,000


$
200,0002005

$
500,000


$
900,000


$
100,000


$
1,300,0002004

$
1,900,000


$
1,300,000


$
2,700,000


$
500,000  41




---



##### Table of Contents



Note 4Lease
    Commitments
   OperatingYear

Leases2007

$
1,121,0002008


796,0002009


489,0002010


361,0002011


1,000Thereafter


Total minimum lease payments

$
2,768,000     Note 5
    Share-Based
    Compensation (
 42




---



##### Table of Contents



2005


2004Net income as reported

$
19,096,000


$
14,699,000Deduct:Total share-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects:Stock Option Plans


(3,735,000
)


(1,619,000
)ESPP


(604,000
)


(552,000
)Pro forma net income

$
14,757,000


$
12,528,000Basic Earnings Per Common ShareAs reported

$
.71


$
.56Pro forma

$
.55


$
.48Diluted Earnings Per Common ShareAs reported

$
.67


$
.53Pro forma

$
.52


$
.45     Stock Option
    Plans
     Incentive Stock
    Options
  43




---



##### Table of Contents



2006


2005


2004Weighted





Weighted





WeightedAverage


Number


Average


Number


Average


NumberPrice


of Shares


Price


of Shares


Price


of SharesBeginning of period

$
10.40



1,529,000


$
7.35



1,969,000


$
5.26



2,206,000Granted










20.71



318,000



13.65



468,000Cancelled


9.68



(84,000
)


5.42



(55,000
)


7.52



(30,000
)Exercised


11.17



(276,000
)


6.93



(703,000
)


4.86



(675,000
)End of period

$
10.27



1,169,000


$
10.40



1,529,000


$
7.35



1,969,000       Options Outstanding


Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseExercise Price Range

Outstanding


Life


Price


Exercisable


Price$2.253.75


216,000



2.89


$
2.99



216,000


$
2.99$4.115.63


269,000



5.52



4.96



269,000



4.96$8.298.29


214,000



6.99



8.29



214,000



8.29$13.6513.65


211,000



7.99



13.65



211,000



13.65$20.7120.71


259,000



4.00



20.71



259,000



20.711,169,000



5.41


$
10.27



1,169,000


$
10.27   Non-Qualified
    Options
     2006


2005


2004Weighted





Weighted





WeightedAverage


Number


Average


Number


Average


NumberPrice


Of Shares


Price


of Shares


Price


of SharesBeginning of period

$
7.18



1,314,000


$
5.63



1,417,000


$
4.52



1,438,000Granted










20.71



108,000



13.65



157,000Cancelled






















Exercised


5.44



(50,000
)


3.67



(211,000
)


3.78



(178,000
)End of period

$
7.25



1,264,000


$
7.18



1,314,000


$
5.63



1,417,000    44




---



##### Table of Contents



Options Outstanding


Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseExercise Price Range

Outstanding


Life


Price


Exercisable


Price$2.253.75


278,000



2.85


$
3.15



278,000


$
3.15$4.095.62


537,000



5.02



4.51



537,000



4.51$8.298.29


192,000



6.99



8.29



192,000



8.29$13.6513.65


150,000



7.99



13.65



150,000



13.65$20.7120.71


107,000



4.00



20.71



107,000



20.711,264,000



5.11


$
7.25



1,264,000


$
7.25   Fair Value
    Valuation Estimates
   2006


2005


2004Risk-Free Interest-Rate






7.00
%


3.00
%Weighted Average Expected
    LifeIncentive Options






2.32 years



2.65 yearsNon-Qualified Options






4.20 years



4.46 yearsExpected Volatility






35.0
%


35.0
%Dividend Yield






1.45
%


1.25
%   Other
    Information
   2006


2005


2004Aggregate intrinsic value of stock
    options exercised

$
3,689,000


$
10,560,000


$
5,383,000Aggregate intrinsic value of
    outstanding stock options


49,309,000



33,556,000



24,590,000   Employee Stock
    Purchase Plan
  45




---



##### Table of Contents



ESPP Annual Offering2006

2005

2004Common shares purchased

43,000

64,000

90,000Per common share purchase price

$  17.92

$ 11.32

$  7.17Amount expensed under ESPP

$481,000



Common shares date of issue

January 17, 2007

January 9, 2006

January 10, 2005   Deferred
    Compensation Plan
   SERP Plan Year2006


2005


2004Amount of company match expensed
    under SERP

$
353,000


$
317,000


$
280,000Treasury shares issued to
    fund SERP expense


12,000



15,000



20,000SERP trust account balance at
    December 31

$
11,705,000
1

$
8,431,000
1

$
5,843,000
1Unrealized gains recorded in SERP
    liability account

$
1,944,000
2

$
1,312,000
2

$
985,000
2     1
    
    SERP trust account investments are recorded at their fair value
    which is based on quoted market prices. Differences between such
    amounts in the table above and the deferred compensation funding
    asset reported on our Consolidated Balance Sheets represent the
    value of our Common Stock held in the Plans
    participants trust account and reported by us as treasury
    stock in our Consolidated Balance Sheets.2
    
    Includes unrecognized gains on our Common Stock held in
    Plans participants trust account of $970,000,
    $607,000 and $659,000 for the 2006, 2005 and 2004 SERP Plan
    years, respectively.    Note 6Other
    Employee Benefit Plans
  Retirement
    Savings Plan
   Note 7Dividends
   46




---



##### Table of Contents



2006 Cash Dividend Payments

1st Quarter

2nd Quarter

3rd Quarter

4th QuarterCash dividend per common share

$.10

$.11

$.12

$.13Payment date

February 13

May 10

August 11

November 10Record date

February 3

April 28

July 28

October 27       three-for-two three-for-two three-for-two
  Note 8Income
    Taxes
   Year Ended December 31,2006


2005


2004Current:Federal

$
14,131,000


$
9,732,000


$
7,687,000State


2,526,000



2,370,000



2,306,00016,657,000



12,102,000



9,993,000Deferred:Federal


(1,138,000
)


(504,000
)


(814,000
)State


(248,000
)


(105,000
)


(172,000
)(1,386,000
)


(399,000
)


(986,000
)Tax Provision

$
15,271,000


$
11,703,000


$
9,007,000      47




---



##### Table of Contents



Year Ended December 31,2006


2005Net current deferred assets:Allowance for doubtful accounts

$
1,293,000


$
915,000Accrued insurance
    claimscurrent


1,821,000



1,771,000Expensing of housekeeping supplies


(2,234,000
)


(2,074,000
)Other


(228,000
)


(257,000
)$
652,000


$
355,000Net noncurrent deferred tax assets:Deferred compensation

$
4,066,000


$
2,364,000Non-deductible reserves


181,000



433,000Depreciation of property and
    equipment


(589,000
)


(822,000
)Accrued insurance
    claimsnoncurrent


4,248,000



4,132,000Amortization of intangibles


(2,541,000
)


Other


38,000



74,000$
5,403,000


$
6,181,000       Year Ended December 31,2006


2003


2004Tax expense computed at statutory
    rate

$
14,253,000


$
10,779,000


$
8,297,000Increases (decreases) resulting
    from:State income taxes, net of federal
    tax benefit


1,198,000



1,576,000



1,386,000Federal jobs credits


(183,000
)


(524,000
)


(641,000
)Tax exempt interest


(373,000
)


(243,000
)


(102,000
)Other, net


376,000



115,000



67,000$
15,271,000


$
11,703,000


$
9,007,000     Note 9Related
    Party Transactions
  48




---



##### Table of Contents



Note 10Segment
    Information
 Reportable
    Operating Segments
       Corporate andHousekeeping


Food


Eliminations


TotalYear Ended December 31,
    2006Revenues

$
412,271,000


$
101,379,000


$
(2,019,000
)

$
511,631,000Income before income taxes


37,857,000



3,398,000



(532,000
)1


40,723,000Depreciation and amortization


1,356,000



136,000



814,000



2,306,000Total assets


101,066,000



23,126,000



91,364,000
2


215,556,000Capital Expenditures


1,359,000



16,000



479,000



1,854,000Year Ended December 31,
    2005Revenues

$
375,133,000


$
92,864,000


$
(1,706,000
)

$
466,291,000Income before income taxes


31,909,000



2,634,000



(3,744,000
)1


30,799,000Depreciation


1,229,000



116,000



527,000



1,872,000Total assets


62,631,000



17,754,000



108,045,000
2


188,430,000Capital Expenditures


1,334,000



2,000



561,000



1,897,000Year Ended December 31,
    2004Revenues

$
357,754,000


$
87,309,000


$
(2,495,000
)

$
442,568,000Income before income taxes


29,336,000



1,934,000



(7,564,000
)1


23,706,000Depreciation


1,191,000



97,000



585,000



1,873,000Total assets


60,958,000



15,546,000



90,460,000
2


166,964,000Capital Expenditures


1,227,000



26,000



1,134,000



2,387,000  49




---



##### Table of Contents



1
    
    represents primarily corporate office cost and related overhead,
    as well as consolidated subsidiaries operating expenses
    that are not allocated to the reportable segments.2
    
    represents primarily cash and cash equivalents, deferred income
    taxes and other current and noncurrent assets.  Total Revenues
    from Clients
   Year Ended December 31,2006


2005


2004Housekeeping services

$
293,374,000


$
262,842,000


$
249,314,000Laundry and linen services


116,254,000



109,764,000



105,545,000Food services


99,513,000



91,244,000



85,593,000Maintenance services and Other


2,490,000



2,441,000



2,116,000$
511,631,000


$
466,291,000


$
442,568,000   Major
    Client
   Note 11Earnings
    Per Common Share
   Year Ended December 31, 2006Income


Shares


Per-Share(Numerator)


(Denominator)


AmountNet Income

$
25,452,000Basic earnings per common share


25,452,000



27,451,000


$
.93Effect of dilutive
    securities:  Options






1,314,000



(.04
)Diluted earnings per common share

$
25,452,000



28,765,000


$
.89   50




---



##### Table of Contents



Year Ended December 31, 2005Income


Shares


Per-Share(Numerator)


(Denominator)


AmountNet Income

$
19,096,000Basic earnings per common share


19,096,000



26,921,000


$
.71Effect of dilutive
    securities:  Options






1,399,000



(.04
)Diluted earnings per common share

$
19,096,000



28,320,000


$
.67   Year Ended December 31, 2004Income


Shares


Per-Share(Numerator)


(Denominator)


AmountNet Income

$
14,699,000Basic earnings per common share


14,699,000



26,221,000


$
.56Effect of dilutive
    securities:  Options






1,439,000



(.03
)Diluted earnings per common share

$
14,699,000



27,660,000


$
.53     Note 12Other
    Contingencies
        51




---



##### Table of Contents



Note 13Cumulative
    Effect of Adjustment to Deferred Compensation
    Liability
 No. 97-14 No. 97-14),
  Note 14Accrued
    Insurance Claims
   and/or
     52




---



##### Table of Contents



Note 15Selected
    Quarterly Financial Data (Unaudited)
  Three Months EndedMarch 31


June 30


September 30


December 312006Revenues

$
118,918,000


$
122,840,000


$
130,083,000


$
139,790,000Operating costs and expenses

$
111,256,000
2

$
113,800,000
2

$
121,475,000
2

$
129,283,000Income before income taxes

$
9,009,000
2

$
10,013,000
2

$
9,906,000
2

$
11,795,000Net income

$
5,676,000
2

$
6,308,000
2

$
6,241,000
2

$
7,227,000Basic earnings per common
    share1

$
.21
2

$
.23
2

$
.23
2

$
.26Diluted earnings per common
    share1

$
.20
2

$
.22
2

$
.22
2

$
.25Cash dividends per common
    share1

$
.10


$
.11


$
.12


$
.132005Revenues

$
114,695,000


$
116,048,000


$
117,684,000


$
117,864,000Operating costs and expenses

$
108,199,000


$
109,494,000


$
110,908,000


$
110,089,000Income before income taxes

$
6,876,000


$
7,393,000


$
7,699,000


$
8,831,000Net income

$
4,263,000


$
4,584,000


$
4,774,000


$
5,475,000Basic earnings per common
    share1

$
.16


$
.17


$
.18


$
.20Diluted earnings per common
    share1

$
.15


$
.16


$
.17


$
.19Cash dividends per common
    share1

$
.06


$
.07


$
.08


$
.09     1
    
    Year-to-date
    earnings and cash dividends per common share amounts may differ
    from the sum of quarterly amounts due to rounding.2
    
    Reflects adjustment for deferred compensation expense. See
    Note 13. The following table details such adjustment by
    reporting period compared to amounts previously reported.  Three Months EndedMarch 31


June 30


September 30Operating costs and expenses
    increase (decrease)

$
183,000


$
(166,000
)

$
513,000Net income increase (decrease)

$
(115,000
)

$
105,000


$
(323,000
)Basic earnings per Common Share
    decrease

$



$



$
( .01
)Diluted earnings per Common Share
    decrease

$



$



$
( .01
)  53




---



##### Table of Contents



Item 9.
    Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure.   Item 9A.
    Controls and Procedures.
  Evaluation of
    Disclosure Controls and Procedures
   Evaluation of
    Internal Control over Financial Reporting
 Form 10-K Form 10-K
  Rules 13a-15(e) 15d-15(e)
  Changes in
    Internal Control over Financial Reporting
 Form 10-K
  Item 9B.
    Other
    Information.   Part III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance.   Item 11.
    Executive
    Compensation.  54




---



##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.   Item 13.
    Certain
    Relationships and Related Transactions.   Item 14.
    Principal
    Accounting Fees and Services   Part IV
  Item 15.
    Exhibits and
    Financial Statement Schedules  (a)  Index
    of Financial Statements
 10-K Item 8-
  (b)  Index
    of Exhibits
   ExhibitNumber

Description3
.1

Articles of Incorporation of the
    Registrant, as amended, are incorporated by reference to
    Exhibit 4.1 to the Companys Registration Statement on
    Form S-2
    (File
    No. 33-35798).3
.2

Amendment to Articles of
    Incorporation of the Registrant as of May 30, 2000, is
    incorporated by reference to Exhibit 3.2 to the
    Companys
    Form 10-K
    for the period ended December 31, 2001.3
.3

Amended By-Laws of the Registrant
    as of July 18, 1990, are incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-2
    (File
    No. 33-35798).4
.1

Specimen Certificate of the Common
    Stock, $.01 par value, of the Registrant is incorporated by
    reference to Exhibit 4.1 of Registrants Registration
    Statement on
    Form S-18
    (Commission File No. 2-87625-W).4
.2**

Employee Stock Purchase Plan of
    the Registrant is incorporated by reference to Exhibit 4(a)
    of Registrants Registration Statement on
    Form S-8
    (Commission File
    No. 333-92835).4
.3**

Amendment to Employee Stock
    Purchase Plan is incorporated by reference to Exhibit 4.3
    to the Companys
    Form 10-K
    for the period ended December 31, 2003.4
.4**

Deferred Compensation Plan is
    incorporated by reference to Exhibit 4(b) of Registrants
    Registration Statement on
    Form S-8
    (Commission File
    No. 333-92835).10
.1**

1995 Incentive and Non-Qualified
    Stock Option Plan, as amended is incorporated by reference to
    Exhibit 4(d) of the
    Form S-8
    filed by the Registrant, Commission File
    No. 33-58765.10
.2**

Amendment to the 1995 Employee
    Stock Option Plan is incorporated by reference to
    Exhibit 4(a) of Registrants Registration Statement on
    Form S-8
    (Commission File
    No. 333-46656).10
.3**

1996 Non-Employee Directors
    Stock Option Plan, Amended and Restated as of October 28,
    1997 is incorporated by reference to Exhibit 10.6 of
    Form 10-Q
    Report for the quarter ended September 30, 1997 filed by
    Registrant on November 14, 1997). 55




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##### Table of Contents



ExhibitNumber

Description10
.4**

Form of Non-Qualified Stock Option
    Agreement granted to certain Directors is incorporated by
    reference to Exhibit 10.9 of Registrants Registration
    Statement on
    Form S-1
    (Commission File No. 2-98089).10
.5**

Amended and restated 2002 Stock
    Option Plan is incorporated by reference to Exhibit 4(1) to
    the Companys Registration Statement on
    Form S-8
    (Commission File
    No. 333-127747)10
.7

Healthcare Services Group, Inc.
    Dividend Reinvestment Plan is incorporated by reference to the
    Companys Registration Statement on
    Form S-3
    (Commission File
    No. 333-108182).14
.

Code of Ethics and Business
    Conduct. Such document is available at our website
    www.hcsgcorp.com.21
.

List of subsidiaries is filed
    herewith in Part I, Item I.23
.

Consent of Independent Registered
    Public Accounting Firm.31
.1

Certification of Principal
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act.31
.2

Certification of Principal
    Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act.32
.1

Certification of the Principal
    Executive Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act.32
.2

Certification of the Principal
    Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act.     **
    
    indicates that exhibit is a management contract or a management
    compensatory plan or arrangement  (c)  Financial
    Statement Schedules
  56




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##### Table of Contents



Signatures
        By:
    /s/  Daniel
    P. McCartney   
    Signature

Title

Date/s/  Daniel
    P. McCartneyDaniel
    P. McCartney

Chief Executive
    Officer and Chairman

February 13, 2007/s/  Joseph
    F. McCartneyJoseph
    F. McCartney

Director and Vice
    President

February 13, 2007/s/  Barton
    D. WeismanBarton
    D. Weisman

Director

February 13, 2007/s/  Robert
    L. FromeRobert
    L. Frome

Director

February 13, 2007/s/  Thomas
    A. CookThomas
    A. Cook

Director, President
    and Chief Operating
    Officer

February 13, 2007/s/  John
    M. BriggsJohn
    M. Briggs

Director

February 13, 2007/s/  Robert
    J. MossRobert
    J. Moss

Director

February 13, 2007/s/  James
    L. DiStefanoJames
    L. DiStefano

Chief Financial
    Officer and
    Treasurer

February 13, 2007/s/  Richard
    W. HudsonRichard
    W. Hudson

Vice President
    Finance, Secretary
    and Chief Accounting
    Officer

February 13, 2007  57