Cautionary Statement Regarding Forward Looking Statements

This report and documents incorporated by reference into this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, are not historical facts but rather based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as "believes", "anticipates", "plans", "expects", "will", "goal", and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; one client accounting for approximately 15% of revenues in 2008-(see notes 1 and 11, "Major Client" in the accompanying Notes to Consolidated Financial Statements); risks associated with our acquisition of Summit Services Group, Inc.; our claims experience related to workers' compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the industry, including state and local regulations pertaining to the taxability of our services; and the risk factors described in Part I in this report under "Government Regulation of Clients", "Competition", "Service Agreements/Collections", and under Item IA "Risk Factors". Many of our clients' revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which Congress has affected through the enactment of a number of major laws during the past decade. These laws have significantly altered,

or threatened to alter, overall government reimbursement funding rates and mechanisms. In addition, the current economic crises could adversely affect such funding. The overall effect of these laws and trends in the long-term care industry have affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies.

Results of Operations
The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of December 31, 2008 and the year then ended and the notes accompanying those financial statements contained herein under Item 8.

As disclosed in Note 2 of the Notes to the Consolidated Financial Statements, the September 18, 2006 Summit acquisition was effective as of August 31, 2006. As of January 1, 2007, Summit's operations were fully integrated into Healthcare Services Group, Inc. The Summit results of operations, for the period September 1, 2006 to December 31, 2006 are included in our 2006 consolidated results of operations and financial information presented below. Such impact, when material and quantifiable, is discussed where we believe it would contribute to the reader's understanding of our financial statements.

As disclosed in Note 14 of the Notes to the Consolidated Financial Statements, a cumulative effect of adjusting our deferred compensation liability resulted from applying the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 108 ("SAB No. 108"). We have adopted SAB No. 108 at December 31, 2006 and for the year then ended. Historically, the appreciation on our Common Stock held in our Deferred Compensation Plan (the "Plan") trust account was not recognized in the reporting of the deferred compensation liability. In accordance with the guidance provided by Emerging Issues Task Force Issue No. 97-14 ("EITF No. 97-14), we increased our recorded deferred compensation liability to reflect the current fair market value of our shares held in the Plan trust account. Prior to the adoption of SAB No. 108, we used the "rollover" method described therein in evaluating the materiality of financial statements' adjustments. We determined the impact from the adjustment to be immaterial to the year ended December 31, 2006 and prior periods' financial results under the "rollover" method. Additionally, we have evaluated the adjustment using the dual approach method described in SAB No. 108. Pursuant to the guidance of SAB No. 108, the adjustment to the liability was accomplished by the recording in 2006 of the cumulative effect, as of January 1, 2006, a $1,432,000 ($856,000 net of income taxes) increase to correct the liability balance as of December 31, 2005. Offsetting

this increase to our liability was a corresponding charge to retained earnings 2006 beginning balance. Additionally, the 2006 financial statements were affected by the adjustment through an approximately $970,000 ($605,000 net of income taxes) increase to the liability with a corresponding charge to deferred compensation expense to reflect the changes in fair market value during 2006.

Overview
We provide housekeeping, laundry, linen, facility maintenance and food services to the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the

United States. We believe that we are the largest provider of housekeeping and laundry services to the long-term care industry in the United States, rendering such services to over 2,100 facilities in 47 states as of December 31, 2008. Although we do not directly participate in any government reimbursement programs, our clients' reimbursements are subject to government regulation. Therefore, they are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We provide our services primarily pursuant to full service agreements with our clients. In such agreements, we are responsible for the management and hourly employees located at our clients' facilities. We also provide services on the basis of a management-only agreement for a very limited number of clients. Our agreements with clients typically provide for a one year service term, cancelable by either party upon 30 to 90 days notice after the initial 90-day period.

We are organized into two reportable segments; housekeeping, laundry, linen and other services ("Housekeeping"), and food services ("Food"). At December 31, 2008, Housekeeping service is being provided at essentially all of our over 2100 client facilities, generating approximating 81% or $487,553,000 of 2008 total revenues. Food services is being provided to approximately 275 client facilities at December 31, 2008 and contributed approximately 19% or $115,165,000 of 2008 total revenues.

The services provided by Housekeeping consist primarily of the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client's facility, as well as the laundering and processing of the personal clothing belonging to the facility's patients. Also within the scope of this segment's service is the laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.

Food consists of providing for the development of a menu that meets the patient's dietary needs, and the purchasing and preparing of the food for delivery to the patients.

Our ability to acquire new clients and increase revenues is affected by many factors. Competitive factors consist primarily of competing with the potential client utilizing an in-house support staff to provide services similar to ours, as well as local companies which provide services similar to ours. We do not believe that there are any other companies, on a national or local level, which have a significant presence or impact on our procurement of new clients in our market. We believe the primary revenue drivers of our business are our ability to obtain new clients and to pass through, by means of service billing increases, increases in our cost of providing the services. In addition to the recoupment of costs increases, we endeavor to obtain modest annual revenue increases from our existing clients to preserve current profit margins at the facility level. The primary economic factor in acquiring new clients is our ability to demonstrate the cost-effectiveness of our services. This is because many of our clients' revenues are generally highly reliant on Medicare and Medicaid reimbursement funding rates and mechanisms. Therefore, their economic decision-making process in engaging us is driven significantly by their reimbursement funding rate structure in relation to how their costs are currently being reimbursed and the financial impact on their reimbursement as a result of engaging us for

the respective services. Another factor is our ability to demonstrate to potential clients the benefit of being relieved of the administrative and operational challenges related to the management of their current staffs who perform such services. In addition, we must be able to assure new clients that we will be able to improve the quality of service which they are providing to their patients and residents. We believe the factors discussed above are equally applicable to each of our segments with respect to acquiring new clients and increasing revenues.

Primarily, our costs of services provided can experience volatility and impact our operating performance in two key cost indicators. They are costs of labor, and costs of supplies, although the volatility of these costs impact each segment somewhat differently due to the respective costs as a percentage of that segment's revenues. Housekeeping is more significantly impacted than Food as a consequence of our management of our costs of labor. Such costs of labor can account for approximately 81%, as a percentage of Housekeeping revenues. Food costs of labor account for approximately 54%, as a percentage of Food revenues. Changes in wage rates as a result of legislative or collective bargaining actions, anticipated staffing levels, and other unforeseen variations in our use of labor at a client service location or in management labor costs will result in volatility of these costs. In contrast, supplies consumed in performing our services is more significant for Food, accounting for approximately 40%, as a percentage of Food revenues, of total operating costs incurred at a Food facility service location. Housekeeping supplies, including linen products, account for approximately 6%, as a percentage of Housekeeping revenues, of total operating costs incurred at a Housekeeping facility service location. Generally, the volatility of these expenses is influenced by factors outside of our control and is unpredictable. This is because Housekeeping and Food supplies are principally commodity products and affected by market conditions specific to the respective products. Although we endeavor to pass on such increases in labor and supplies costs to our clients, the inability or delay in procuring service billing increases to reflect these additional costs would negatively impact our profit margins.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. Any of these changes would adversely affect the liquidity of our clients, resulting in their inability to make payments to us as agreed upon. Congress is considering major economic stimulus legislation which may help to counter the impact of the economic crisis on state budgets. The proposed legislation includes the temporary provision of additional federal matching funds to help states maintain their Medicaid programs. Even if this legislation is enacted in its current form, given the volatility of the economic environment, it is difficult to predict the impact of this legislation on our clients' liquidity and their ability to make payments to us as agreed.

In addition to Summit (whose operations were fully integrated into Healthcare's on January 1, 2007), we operate two wholly-owned subsidiaries, HCSG Supply, Inc. ("Supply") and Huntingdon Holdings, Inc. ("Huntingdon"). Supply purchases, warehouses and distributes the supplies and equipment used in providing our Housekeeping segment services. Huntingdon invests our cash and cash equivalents, as well as managing our portfolio of available-for-sale marketable securities.

Consolidated Operations
The following table sets forth, for the years indicated, the percentage which
certain items bear to consolidated revenues:


                                           Relation to Consolidated Revenues
                                           Years Ended December 31,
                                           2008              2007             2006

     Revenues                                    100.0 %           100.0 %      100.0 %
     Operating costs and expenses:
     Costs of services provided                   86.5              85.4         85.7
     Selling, general and administration           6.5               7.0          7.3
     Investment and interest income                 .2                .7          1.0

     Income before income taxes                    7.2               8.3          8.0
     Income taxes                                  2.8               3.2          3.0

     Net income                                    4.4 %             5.1 %        5.0 %

Subject to the factors noted in the Cautionary Statement Regarding Forward Looking Statements included in this report, we anticipate our financial performance in 2009 may be comparable to the 2008 percentages presented in the above table as they relate to consolidated revenues.

Housekeeping is our largest and core reportable segment, representing approximately 80% of 2008 consolidated revenues. Food revenues represented approximately 19% of 2008 consolidated revenues. Additionally, other ancillary services accounted for 1% of 2008 consolidated revenues.

Although there can be no assurance thereof, we believe that in 2009 each of Housekeeping's and Food's revenues, as a percentage of consolidated revenues, will remain approximately the same as their respective 2008 percentages noted above. Furthermore, we expect the sources of growth in 2009 for the respective operating segments will be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Food is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.

2008 Compared with 2007
The following table sets forth 2008 income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases (decreases) of each compared to 2007 amounts. The differences between the reportable segments' operating results and other disclosed data and our consolidated financial statements relate primarily to; corporate level transactions, recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles and transactions between reportable segments and our warehousing and distribution subsidiary.

                                                                 Percent                              Reportable Segments
                                                                 increase          Corporate and      Housekeeping                 Food
                                               Consolidated      (decrease)        eliminations       Amount            %incr      Amount            %incr

Revenues                                       $ 602,718,000              4.3 %    $   (1,645,000 )   $ 488,954,000        4.5 %   $ 115,409,000        4.9 %
Cost of services provided                        521,269,000              5.7         (33,223,000 )     442,354,000        4.6       112,138,000        4.6
Selling, general and administrative               39,523,000             (1.9 )        39,523,000                 -                            -
Investment and interest income                     1,349,000            (66.5 )         1,349,000                 -                            -
Income before income taxes                     $  43,275,000            (10.0 )%   $   (6,596,000 )   $  46,600,000        3.9 %   $   3,271,000       15.6 %

Revenues

Consolidated
Consolidated revenues increased 4.3% to $602,718,000 in 2008 compared to $577,721,000 in 2007 as a result of the factors discussed below under Reportable Segments.

We have one client, a nursing home chain ("Major Client"), which in 2008 and 2007 accounted for 15% and 16%, respectively, of consolidated revenues. At both December 31, 2008 and 2007 amounts due from such client represented less than 1% of our accounts receivable balance. This client completed its previously announced merger on March 14, 2006. Our relationship with this successor entity remains under the same terms and conditions as established prior to the merger . Although we expect to continue the relationship with this client, there can be no assurance thereof, and the loss of such client, or a significant reduction in the revenues we receive from this client, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client changes its payment terms it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Reportable Segments
Housekeeping's 4.5% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.

Food's 4.9% net growth in reportable segment revenues is primarily a result of providing this service to an increasing number of existing Housekeeping clients.

We derived 14% and 17%, respectively, of Housekeeping and Food's 2008 revenues from our Major Client.

Costs of services provided

Consolidated
Cost of services provided, on a consolidated basis, as a percentage of
consolidated revenues for 2008 increased to 86.5% from 85.4% in 2007. The
following table provides a comparison of the primary cost of services
provided-key indicators that we manage on a consolidated basis in evaluating our
financial performance.


Cost of Services Provided-Key Indicators                2008%     2007%     Incr (Decr)%

Bad debt provision                                           .7      1 .1      (.4)
Workers' compensation and general liability insurance      3 .4      3 .1       .3

The decrease in bad debt provision is primarily a result of less expense recorded related to certain nursing homes filing for bankruptcy. In the period when a client files for bankruptcy, we record a bad debt provision based upon our initial estimate of ultimate collectability. We revise such provision as additional information is available which we believe enables us to have a more accurate estimate of the collectability of an account. Some of our clients may experience liquidity problems because of governmental funding or operational issues. Such liquidity problems may cause them to not pay us as agreed upon or necessitate them filing for bankruptcy protection. In the event of additional clients filing for bankruptcy protection, we would increase our bad debt provision during our reporting period of such filing. Therefore, if more clients file for bankruptcy protection or if we have to increase our current provision related to existing bankruptcies, our bad debt provision may increase from our last two years' average of .9%, as a percentage of consolidated revenues.

The workers' compensation and general liability insurance expense increase is primarily a result of unfavorable claims' experience during the year.

Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for 2008 remained essentially the same at 90.5% compared to 90.4% in 2007. Cost of services provided for Food, as a percentage of Food revenues, decreased slightly for 2008 to 97.2% from 97.4% in 2007.

The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segment's revenues, that we manage on a reportable segment basis in evaluating our financial performance:

       Cost of Services Provided-Key Indicators   2008%     2007%     Incr (Decr)%

       Housekeeping labor and other labor costs     81 .4     81 .5         ( .1)
       Housekeeping segment supplies                 6 .2      5 .2         1 .0
       Food labor and other labor costs             53 .2     54 .9        (1 .7)
       Food segment supplies                        40 .1     38 .6         1 .5

Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, remained essentially unchanged in comparison to the prior year. We can realize volatility in Housekeeping labor and other labor costs from time to time as a result of inefficient management of labor in respect to adhering to established labor and other labor costs benchmarks at various operational levels, or the timing of passing through to clients changes in wage rates as a result of legislative or collective bargaining actions. Although we believe these factors were controlled effectively in 2008 in comparison to 2007, ineffective control of these factors in the future would result in unfavorable volatility in our labor and other labor costs. We realize volatility in the costs of supplies utilized in providing our Housekeeping services. The increase in Housekeeping supplies resulted primarily from vendor price increases and inefficiencies in managing such

costs. Our supplies' costs are impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control. Although we endeavor to pass on to clients such increased costs, from time to time, sporadic unanticipated increases in the costs of certain supply items due to economic conditions may result in a timing delay in obtaining such increases from our clients. Additionally, if the increase is a result of a temporary market condition or change in availability of the specific commodity, and trends indicate it will not continue, we may not be able to pass such temporary increase on to our clients until the time of our next scheduled annual service billing review.

The decrease in Food labor and other labor costs, as a percentage of Food revenues, resulted primarily from efficiencies in managing these costs as compared to prior periods. As noted above in the Housekeeping labor and other labor costs discussion, our ability to control volatility in labor and other labor costs is directly related to our efficient management of labor at the various Food operational levels in respect to established staffing benchmarks, as well as procuring on a timely basis increases from clients to reflect increased labor and other labor costs. We believe Food's improvement in labor and other labor costs is a result of addressing such volatility factors effectively.

The increase in Food supplies, as a percentage of Food segment revenues, is a result of vendor price increases. Food supplies, to a much greater extent than Housekeeping supplies, are impacted by commodity pricing factors, which in many cases are unpredictable and outside of our control. Although we endeavor to pass on to clients such increased costs, from time to time, sporadic unanticipated increases in the costs of certain supply items due to market economic conditions may result in a timing delay in passing on such increases to our clients. Additionally, in 2008 many of the Food supplies' increases were the result of the impact of temporary market conditions on the specific commodity which we did not anticipate and were unable to predict the extent of the upward trend in such supply costs. It is this type of spike in Food supplies' costs that most adversely affects Food's operating performance because of the delay in passing on such costs to our clients, as well as the fact that in some instances we may not be able to pass such increase on to our clients until the time of our next scheduled service billing review.

Consolidated Selling, General and Administrative Expense Although consolidated revenues, selling, general and administrative expenses decreased by $761,000 or 1.9% as a percentage of consolidated revenues, the decrease resulted primarily from the affect of recording an offset to compensation expense (reported in this financial statement item) reflecting the decrease in our Deferred Compensation liability of approximately $2,389,000 due to decline in market value of the investments held in our Deferred Compensation Fund as noted below in Consolidated Investment and Interest Income discussion. Absent the effect of market value change in our Deferred Compensation Fund, consolidated selling, general and administrative expenses increased $1,868,000 or 4.7% as a percentage of consolidated revenues, which is consistent with our 4.3% growth in revenues.

Consolidated Investment and Interest Income . . .